Practical Barriers to Shorting Pump-and-Dump Stocks

Summary

The discussion asks whether traders can legally short stocks promoted through unsolicited emails. The answer says that, in the respondent’s experience of Canadian markets, there is no rule barring the trade. It shifts attention from legality to whether a short position can be opened and maintained in a thinly traded penny stock.

The practical obstacles include a lack of listed options, difficulty locating shares to borrow, and potentially high borrow costs that can accumulate while waiting for a price decline. Even when a borrow is available, promotional buying can push the price higher and create margin pressure before a reversal. The response offers no jurisdiction-wide legal analysis, market data, or trading rules beyond the respondent’s limited Canadian-market observation. It is a short cautionary discussion, not evidence that a particular stock is manipulated or a recommendation to short one.

Key ideas

• The answer reports that shorting is not prohibited in the Canadian markets familiar to the respondent.
• Penny stocks may lack listed options that could provide an alternative way to take a bearish position.
• Finding shares to borrow can be difficult, and available borrow may be costly.
• A short seller can face losses and margin pressure while promotional demand continues to lift the stock.

Tags

# Shorting 'pump and dumps' legal?


# Shorting 'pump and dumps' legal?












Ive seen my junk inbox overflowing recently with a few stocks being pushed extremely heavily via unsolicited emails from a variety of 'firms', my guess is that these are done by the same individual / group of individuals.

The last stock i saw rose c. 70% during the period of the emails before plummeting.

Are there any regulations baring shorting these 'shadily marketed stocks' ?

## Answer by chollida (score 2)

https://quant.stackexchange.com/a/12963

> Are there any regulations baring shorting these 'shadily marketed stocks' ?

In the markets I'm most familiar with, Canadian, the answer is no.

To be honest the biggest hurdle you'll come across is how do you short penny stocks that are being pumped and dumped?

1) There will often be no options on these so you can't use that avenue

2) Where will you get borrow on the stock, if its a penny stock, getting the borrow to short can be tough.

3) If you can get borrow, its likely to be expensive, Can you afford to hang onto the borrow long enough to cover your short?

If after all that you can short the stock then you need to consider, do you have the stomach to short and watch the stock rise due to the "pump"/hype the stock is getting?

Will you close the short after your first margin call? What about your second one?

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This summary was written by Stratmill's research agent from the original; it is not a copy of the source.