Short Selling StrategiesTwo Dozen Types of Short SalesBy William CatePublished August 2002[http://home.earthlink.net/~beowulfinvestments/] [http://home.earthlink.net/~beowulfinvestments/globalvillagei...
Short Selling Strategies Two Dozen Types of Short Sales By William Cate Published August 2002 [http://home.earthlink.net/~beowulfinvestments/] [http://home.earthlink.net/~beowulfinvestments/globalvillageinvestmentclubwelcome/]
There are dozens of ways to sell short a stock.
1. Traditional Short Sale: Borrow the stock against a fifty percent margin. This is the only type of short sale that can be squeezed when the share price moves up because the short seller must add money to their margin account.
2. A Market Maker Short Sale: U. S. Market Makers are not required to make physical delivery of stock certificates when they sell it. They are assumed to be a repository of the company's shares.
3. A Brokerage House Short Sale: This is a decision not to execute a buy order from a client, but show the stock as owned by the client on their monthly brokerage firm account statement.
4. A Clearing House Short Sale: The Clearing House doesn't execute the buy order, but credits it to the brokerage firm client's account.
5. A Naked Short Sale: This is where two brokerage firms agree to trade stock in a company with neither brokerage firm requesting physical delivery of the share certificates.
6. An Insider Short Sale: This is when insiders with restricted stock use it to sell short their company. It's illegal. It was a common practice when the Regulation S Hold Period was 40 days.
7. A Ferrari Short Sale: This is where a bloc of stock is purchased. The stock is converted to derivatives, thus factoring the stock one hundred fold or more. The short sale doesn't occur in the Stock Market, but the derivative owners are holding a short position.
8. The DTC Short Sale: This is when Depository Trust Companies use the stock they hold to sell short that stock.
9. The International Short Sale: Stock's created offshore. The company is listed to trade outside the United States (usually Canada). However the company is trading in the States. The shares are sold into the States. The Short Sale is moved to the Primary Country, where the local brokers can ensure that the short position will be covered by the listed company, if there is ever a successful short squeeze.
10. The Arbitrage Short Sale: LTV - Scattered Securities is an example of this short play. The Court in the LTV reorganization determined the exchange rate for new shares for old shares at three cents. The Market didn't read the Court decision. The old shares traded far higher than the Court Ordered exchange rate. The short sale was done by selling old shares and buying new shares before the Court mandated exchange of share certificates.
11. The Street Stock Short Sale: Sellers who are insiders or who allege to be insiders sell counterfeit stock to buyers outside regular market channels.
12. The MIDI Short Sale: Brokers sell stock at prices well above the actual trading price of the stock. This has been popular with German OTC stocks sold into the Middle East. The gap between the sale price and the trading price is an effective short sale.
13. The Depository Receipt Short Sale: Using counterfeit stock, the seller deposits it into an overseas bank. They then sell Depository Receipts against the counterfeit shares held by the bank. I've seen this done in Asia.
14. The Rockford Short Sale: An investment firm buys shares and takes physical delivery of the stock certificates. They replace the real share certificates with counterfeit share certificates. Next they sell the real shares back into the Market and repeat the process. This practice does wonders for their balance sheet. The tactic was popularized in the Rockford TV Series. It's been done in Asia with NYSE shares.
15. The Tax Haven Bank Short Sale: Small (usually Caribbean) banks act as agents for their clients unwilling to reveal their identity. The client wants to buy stock. The bank doesn't buy the stock on behalf of the client. They simply show the sale within the bank's accounting system. This practice extends to gold etc.
16. The Lost Certificate Short Sale: Client requests share certificate. Broker sends it certified to the slightly wrong address. It's returned to broker. Using the certified receipt broker claims the client has the share certificate. A year is spent in proving it never arrived. Meanwhile the broker has the share certificate and can use it to cover other short sales. This happened to me in Vancouver.
17. The Margined Short Sale: Buyer buys stock on margin. They can't take physical delivery of their share certificates. The broker sells the margined account non-existent stock (a short sale).
18. The Takeover Short Sale: Brokers add non-existent stock into a takeover with stock transaction. The buyer pays for the non-existent shares. The short seller gets cash or stock in the buyers company.
19. The Attrition Short Sale: For OTC stocks about 3% of the beneficial owners of the stock disappear each year. They die, forget they own the stock, etc. Brokers can safely sell short 3% of the float each year relying on the fact that the beneficial owners will never claim their stock.
20. Counterfeit Stock: Professionals regularly send counterfeit share certificates to Transfer Agents. A surprising percentage are accepted as real share certificates. The result is the professional effectively has sold short the shares involved in the certificate.
21. Issue Depository Receipts without holding the stock and sell the Depository Receipts.
22. The Warrant or Option Short Sale. Buyer holds the right to exercise warrants or options, but doesn't do so. Instead, they sell short the stock and use the options or warrants as insurance. This was popular among VSE underwriters in the 1980s-1990s
23. Reg S Short Sale. Same format as the Warrant or Option Short sale, but using cheap Reg S stock. The short seller is exposed for one year.
24. The Lending Short Sale. This was used by the guy who introduced me to the business. You offer to lend 90% of the face value of the stock to the borrower for a long period of time. Your interest rate is better than that of a bank. You take in the stock and sell it. You lend 90% of the proceeds from the sale. You are now short the stock. You collect your interest payments until the borrower defaults on the loan.
To contact the author: Visit the Beowulf Investments website: [http://home.earthlink.net/~beowulfinvestments/] Or, visit the Global Village Investment Club Website: [http://home.earthlink.net/~beowulfinvestments/globalvillageinvestmentclubwelcome/]
He has been the Managing Director of Beowulf Investments [http://home.earthlink.net/~beowulfinvestments/] since 1981 and is the Executive Director of the Global Village Investment Club [http://home.earthlink.net/~beowulfinvestments/globalvillageinvestmentclubwelcome/]