In a normal short sale transaction, Interactive Brokers does not arrange to borrow stock on the client’s behalf until settlement, also known as T+2. In the case of a pre-borrow, Interactive Brokers will attempt to borrow stock on the client’s behalf the day the request is submitted.
Because Interactive Brokers, like other broker dealers, generally does not borrow stock until settlement date, there is a possibility that, come settlement date, IBKR is unable to borrow sufficient shares. On those rare occasions, per SEC regulations, this failure to deliver may result in a client’s short being closed out.
By pre-borrowing a stock, the client, and IBKR, reduce the likelihood of a failure to deliver, thus reducing the likelihood of a client’s short being closed out. There is no formula, however, for when a client should pre-borrow a stock. It is purely up to the client’s discretion.
The primary benefit to pre-borrowing, as described earlier, is first and foremost the reduction in the probability that a short will be closed out. A supplemental benefit is that a pre-borrow can also actively locate and provide the client greater flexibility when entering short sell orders. Any pre-borrowed shares that do not have an offsetting short position will automatically be returned after one settlement cycle.
Because a borrow to cover a short sale is not required until settlement date, by pre-borrowing the client is electing to pay the financing cost on a borrow earlier than required. Once the pre-borrow request has been executed, the client will begin paying the borrow cost that day, plus a $20 borrow fee per executed pre-borrow. Although pre-borrowing shares reduces the probability of a closeout on settlement date, it does not guarantee a closeout cannot occur. Keep in mind that the potential closeout protection offered by pre-borrowing will only apply to new shorts. Existing short positions may still be exposed to third-party buy-ins.
Further, as described earlier, pre-borrowing is a tool generally used when borrowable liquidity is not ample. As a result, IBKR is not always able to satisfy all pre-borrow requests. Entering a pre-borrow request does not guarantee the client will receive a pre-borrow.
Finally, the indicative fee rates displayed on TWS are not necessarily the rates at which stock will be borrowed. Rates are subject to change.
However, pre-borrowing stocks for short selling also comes with associated risks. One of the biggest risks is that the price of the stock may increase, which could result in losses for the short seller. Additionally, there may be a shortage of stock available to borrow, which could prevent the short seller from executing their strategy.
Furthermore, pre-borrowing stocks for short selling requires careful market analysis and a thorough understanding of the stock being shorted and the potential risks involved. The practice can also be affected by regulatory changes or market events, which can impact the ability to pre-borrow stocks and execute short selling strategies.
In conclusion, pre-borrowing stocks for short selling can be a high-risk strategy that is not suitable for all investors. It’s important to carefully consider your investment goals, risk tolerance, and level of financial knowledge and experience before engaging in this practice. It’s recommended to seek the advice of a financial professional before making any investment decisions.
Prior to executing a pre-borrow, clients must enroll in the pre-borrow program, which can be achieved via the Client Portal website.
· Please navigate to, Settings – Account Settings
· Click the link titled “Trading Permissions”
· A new page will display a range of products and instruments
· Select “Stocks,” then check the box next to “Pre-borrow Program”
· Click “Submit” to update your selections
There is no cost to enroll in the program and enrollment is generally effective on the next business day. Keep in mind, that enrolling in the program only allows clients to enter pre-borrow requests. The program does not mean that all future short sales will trigger pre-borrows.
Trade entry of pre-borrows is done by the client in TWS.
To enter a Pre-borrow:
· right-click on the symbol
· scroll to Trade and
· click on Pre-borrow Shares for Shorting
A stock loan/borrow screen comes up. A notification will pop up stating that pre-borrow orders are market orders, asking to convert the order from a Limit order to a Market order. This simply means that the account pre-borrows at the mark price, which is 102% of the closing price rounded up to the nearest point. That is the amount of collateral that borrow fees will be charged upon. Keep in mind that pre-borrowing is not selling short.
· If you would like to pre-borrow, please click “Yes” at the prompt.
· Enter the desired quantity and click “Transmit.”
Pre-borrow limit orders at custom marks or rates are not supported.
To be eligible for the program, the account must be a Portfolio Margin account. The pre-borrow marketplace is open from 6:45amET to 2:45pmET. Pre-borrow requests must be for a value of at least $10,000. The program only applies to US equities.
After executing a pre-borrow the client will be able to see the details in their daily statements, including
the number of shares pre-borrowed, collateral value and any associated fees and interest.
Keep in mindthat statements display stock loan information on a T-1 basis. This means that a Friday statement willdisplay interest and fees as of Thursday. The date used to calculate fees and interest can be seen in the “Value Date” column in the Securities Pre-borrowed statement section.
The TWS Private Locate column will display executed pre-borrows in real-time.
In summary, pre-borrowing is another tool at the client’s disposal. While not applicable in every situation, pre-borrowing can offer greater confidence and flexibility when short selling. Please refer to the Interactive Brokers website for a more detailed overview of the program and feel free to reach out to customer service with any additional questions.
Disclosure: Interactive Brokers
The analysis in this material is provided for information only and is not and should not be construed as an offer to sell or the solicitation of an offer to buy any security. To the extent that this material discusses general market activity, industry or sector trends or other broad-based economic or political conditions, it should not be construed as research or investment advice. To the extent that it includes references to specific securities, commodities, currencies, or other instruments, those references do not constitute a recommendation by IBKR to buy, sell or hold such investments. This material does not and is not intended to take into account the particular financial conditions, investment objectives or requirements of individual customers. Before acting on this material, you should consider whether it is suitable for your particular circumstances and, as necessary, seek professional advice.
The views and opinions expressed herein are those of the author and do not necessarily reflect the views of Interactive Brokers LLC, its affiliates, or its employees.
Any trading symbols displayed are for illustrative purposes only and are not intended to portray recommendations.
In accordance with EU regulation: The statements in this document shall not be considered as an objective or independent explanation of the matters. Please note that this document (a) has not been prepared in accordance with legal requirements designed to promote the independence of investment research, and (b) is not subject to any prohibition on dealing ahead of the dissemination or publication of investment research.