Dumb Question # 1: Shorting Widget, Inc.

[zyzzyva57]

When you short Widget, say at $10, where/how exactly does the broker get the stock to sell for you?

[David Briggs]

First, from other customers of your broker who are long the stock. Second, from other brokers with whom your broker has a securities lending arrangement.

[zyzzyva57]

Then, as with a bank, knowing there won't be a run on the bank and thus the bank can lend out the depositors' money as long as the bank can serve any one customer--but not all the customers at once, the broker is doing basically the same thing but with stocks.

The broker knows everyone won't dump out of a stock at the same time, so s/he has a "slush" of a particular stock s/he can sell to me to short? Who tha-heck determines the amount of this "slush" a broker can play with? I know with banks, the FEDs have guidelines, but with brokers, who?

[David Briggs]

SEC Regulation SHO governs short selling. It is MUCH more liberal that banking reserves. It is based on good faith identification of where deposits of long shares exist *each day*, and their availability to be borrowed if needed for delivery.

Here is a recent Q&A which discusses an ongoing pilot program to modernize Regulation SHO. The SEC is seeking to make doing business on the short side more flexible for broker dealers without allowing "counterfeit" shares to be created through naked short selling.

http://sec.gov/divisions/marketreg/mrfaqregsho1204.htm

[David Briggs]

Correction: Reg SHO is already modern. The pilot program is to suspend the previous regulatory requirement that short sales be transacted only on an uptick.

[zyzzyva57]

Thanks for the site...A quick read of it seems to be what I want to plow through deeper...When I "Google" the term, I get a lot of quicky answers, but I wanted to know the "guts" of the term...I shall make a hard copy of the Q&A on SHO to read through it slowly...Again thank you for providing what I wanted, but did know exactly what I wanted till I saw what I wanted :)

[optimus25]

What about naked shorting? Haven't heard much about this issue in a while now.