The Long and the Short of It

WOULDN’T YOU THINK IT A LITTLE HYPOCRITICAL if your publicly traded online brokerage, which is working hard to appeal to frequent traders, didn’t allow you to have a short position in its stock? When that happened to an Electronic Investor reader in Houston, he shot me an e-mail.

Normally, one establishes a short position in a stock by entering a sell order without holding the stock in question. Traders who take this route are forecasting a drop in the stock’s price; they expect to buyback shares, or cover the position, at some point. The usual stock-trading mantra, “buy low, sell high,” is reversed by short sellers, whose goal is: “Sell high, buy low.”

In order to sell a stock short, the broker has to have stock that the seller can borrow. The inventory of shares that can be borrowed depends on other customers who have purchased that stock in their margin accounts. Traders and brokers must also comply with Regulation SHO (details at http://www.sec.gov/spotlight/keyregshoissues.htm), an SEC guideline designed to, among other things, eliminate “naked” short selling, which is selling the stock short without borrowing it first. But there are other ways to end up with a short position in a stock, notably through options trading.

Your fellow reader said in his e-mail that his broker, TD Ameritrade (http://www.tdameritrade.com), closed a short position on its stock that he held in his account because it’s against company policy to allow customers to short the shares (ticker: AMTD). Somehow, he had slipped through the cracks after writing naked calls against the stock in April that was exercised in May. He had a long position in another online broker’s stock, so he was happy to hold on to the short in AMTD as a hedge.

At first, he said, a TD Ameritrade staffer called and told him the firm closed the position because the stock was on its “hard to borrow” list, presumably because there weren’t a lot of shares available to trade.

Then, the reader noted, the employee conceded that it was against company policy. If you try to sell AMTD short on TD Ameritrade’s system, you will get an error message saying, “Short sell orders for AMTD are not accepted.” However, it is still possible to sell naked calls and buy puts, which generate commissions and can result in a short position down the road. The reader commented, “Come on, now…Why isn’t that precluded, given the potential for ending up short their stock?”

Kim Hillyer, senior manager, communications and public affairs, at TD Ameritrade, confirmed to Barron’s that the policy did exist and had been in place for more than 10 years.

That prompted us to check around with other publicly traded brokers to see if this was a common policy, as Hillyer suggested. And we did find one, E*Trade (ETFC), that similarly prevents its customers from shorting its stock.

However, representatives of Schwab (SCHW) (http://www.schwab.com), Interactive Brokers (IBKR) (http://www.interactivebrokers.com), SiebertNet (SIEB) (http://www.siebertnet.com) and optionsXpress (OXPS) (http://www.optionsXpress.com) say they do allow clients to short their shares.

Even Tom Sosnoff, a senior vice president of the trading group at TD Ameritrade since his firm, thinkorswim (http://www.thinkorswim.com), was acquired by TD Ameritrade earlier this year, says thinkorswim clients can short its stock.

There’s a happy ending to this tale. On Sept. 16, after I asked officials at TD Ameritrade whether my reader’s concern was well placed, the firm revised its stand. Said Hillyer via e-mail, “We have rescinded our policy on shorting TD Ameritrade stock. The [new] policy is in effect as of today. It was a long-standing policy, and your e-mail gave us an opportunity to review and make the decision to discontinue it.”

Now E*Trade is the only mainstream broker to disallow client shorting.

VERIFY YOUR TRADE FOR FREE: Have you ever wondered whether you really got the best price at the instant your trade was executed? The NASDAQ DataStore has made a free version of one of its tools, Market Replay, available to individual investors at the NASDAQ OMX DataStore (data.nasdaq.com). We took a look at version 1.1 of this tool when it was introduced in March 2008; it is currently up to version 2.4.

Market Replay can reconstruct the events around a trade to determine whether there was a missed opportunity or an unforeseen event. Brokers can send clients a Nasdaq-validated screen shot of the moment their particular trade occurred, confirming the quality of the execution, thereby alerting customers if they got the best price.

There are two versions of Market Replay available. Both are Adobe Air applications, and open in a separate window. To get going, you enter a ticker and the date and time you want to examine. Then you view a chart showing all the trades executed for that particular symbol. The National Best Bid is represented by a blue line and Best Offer by a green line.

Market Replay LITE, the free version, lets you view up to 10 queries per day, and gives you one minute of data at a time. You can view replays for trades executed over the three previous days. For $9.99 a month, you can access Market Replay PLUS, which allows unlimited queries showing three minutes of data, and five days of historical data. PLUS subscribers get additional volume data as well.

MORE MOBILE TRADING: Interactive Brokers has announced a beta version of its iTWS trading application for the iPhone. Available from the App Store on your iPhone, iTWS lets you trade stocks, options, futures, futures options, and warrants on over 80 markets internationally. For security purposes, you’ll need your IB-account unlock card handy.

The app also lets you stream data and monitor your trades and account balances. The portfolio manager doesn’t show profit and loss, but that’s a minor quibble.

Posted by on 09/26 at 05:13 AM

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