How Stock Loan Locates Work for Short Sellers
Summary
The document gives a broker’s-eye explanation of stock loan locates, which help a short seller establish that shares can be borrowed before selling short. The response says a locate is generally valid for one day and that brokers may not charge customers separately when a trade is executed, while repeated unused locate requests could prompt fees or affect the customer relationship. These statements are presented as the respondent’s impression, not as universal rules.
A locate does not mean the brokerage itself necessarily owns or reserves the shares on its balance sheet. Instead, the response describes brokers arranging for a share holder to set shares aside for potential borrowing. It also distinguishes agency brokerage, where the broker does not need to hedge the stock exposure, from principal trading, where the broker’s risk-management approach can vary. The exchange is brief and does not cover locate pricing schedules, borrow fees, hard-to-borrow situations, or differences among brokers and markets.
Key ideas
- A locate is described as confirmation that shares can be reserved for a potential short sale.
- The response says locates are generally valid for one day, though this may vary by broker.
- A broker may arrange access to shares held by another investor rather than owning them itself.
- Agency brokers generally do not take the same stock exposure as a principal trading desk.
- The exchange offers a general account, not universal pricing or operational rules.
Tags
Full text
# How do brokers charge for locates? # How do brokers charge for locates? Few quick questions on how locates work. - How do brokerages charge for locates? They charge based on volume? How long you need the locate (I assume an one day is max)? - Do the brokerages actually hold the underlier 1:1 with the potential short? AKA: If I want the ability to short IBM 1 million shares, does the brokerage actually hold 1 million in order to cover? Or do they just hold a certain ratio of the total? - How do brokerages hedge themselves against underlier price movement? Do they buy options? I assume that would factor in to the cost of the locate. ## Answer by Tal Fishman (score 1) https://quant.stackexchange.com/a/3428 I'm not an expert on this topic by any means, but my impression is: - Generally brokers will not charge for locates unless you start asking for a lot more than you end up using. Locates are good for one day only. I would imagine the brokers themselves are charged some small fee for the locate, but for the customer this fee is just part of the commission for executing the trade. If you frequently locate but do not execute, then they are not earning commissions and will either drop you as a customer or start charging for locates. - Brokerages do not hold anything when you request a locate. They merely contract with someone who holds the shares to exclusively put aside the shares for potential short selling with that brokerage. It is often arranged through an inter-dealer broker such as SSgA. The holders are often long-term holders with no plans to sell the shares any time soon. - There is no need for a brokerage to hedge itself, particularly if the broker is acting as a pure agency broker. For orders executed as principal, the story may differ significantly from one broker to another. Even if the brokerage is holding the shares, it is typically holding them on behalf of some other client, which obviously wants the risk associated with that stock. The brokerage is then making a calculated bet that the majority of their clients will not all want to sell their shares on the same day.
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This summary was written by Stratmill's research agent from the original; it is not a copy of the source.