Short Selling Strategies
Two Dozen Types of Short Sales
By William Cate
Published August 2002
[http://home.earthlink.net/~beowulfinvestments/] [http://home.earthlink.net/~beowulfinvestments/globalvillageinvestmentclubwelcome/]
There are dozens of ways to sell short a stock.
1. Traditional Short Sale: Borrow the stock against a fifty percent margin.
This is the only type of short sale that can be squeezed when the share
price moves up because the short seller must add money to their margin
account.
2. A Market Maker Short Sale: U. S. Market Makers are not required to make
physical delivery of stock certificates when they sell it. They are assumed
to be a repository of the company's shares.
3. A Brokerage House Short Sale: This is a decision not to execute a buy
order from a client, but show the stock as owned by the client on their
monthly brokerage firm account statement.
4. A Clearing House Short Sale: The Clearing House doesn't execute the buy
order, but credits it to the brokerage firm client's account.
5. A Naked Short Sale: This is where two brokerage firms agree to trade
stock in a company with neither brokerage firm requesting physical delivery
of the share certificates.
6. An Insider Short Sale: This is when insiders with restricted stock use
it to sell short their company. It's illegal. It was a common practice when
the Regulation S Hold Period was 40 days.
7. A Ferrari Short Sale: This is where a bloc of stock is purchased. The
stock is converted to derivatives, thus factoring the stock one hundred
fold or more. The short sale doesn't occur in the Stock Market, but the
derivative owners are holding a short position.
8. The DTC Short Sale: This is when Depository Trust Companies use the
stock they hold to sell short that stock.
9. The International Short Sale: Stock's created offshore. The company is
listed to trade outside the United States (usually Canada). However the
company is trading in the States. The shares are sold into the States. The
Short Sale is moved to the Primary Country, where the local brokers can
ensure that the short position will be covered by the listed company, if
there is ever a successful short squeeze.
10. The Arbitrage Short Sale: LTV - Scattered Securities is an example of
this short play. The Court in the LTV reorganization determined the
exchange rate for new shares for old shares at three cents. The Market
didn't read the Court decision. The old shares traded far higher than the
Court Ordered exchange rate. The short sale was done by selling old shares
and buying new shares before the Court mandated exchange of share
certificates.
11. The Street Stock Short Sale: Sellers who are insiders or who allege to
be insiders sell counterfeit stock to buyers outside regular market
channels.
12. The MIDI Short Sale: Brokers sell stock at prices well above the actual
trading price of the stock. This has been popular with German OTC stocks
sold into the Middle East. The gap between the sale price and the trading
price is an effective short sale.
13. The Depository Receipt Short Sale: Using counterfeit stock, the seller
deposits it into an overseas bank. They then sell Depository Receipts
against the counterfeit shares held by the bank. I've seen this done in
Asia.
14. The Rockford Short Sale: An investment firm buys shares and takes
physical delivery of the stock certificates. They replace the real share
certificates with counterfeit share certificates. Next they sell the real
shares back into the Market and repeat the process. This practice does
wonders for their balance sheet. The tactic was popularized in the Rockford
TV Series. It's been done in Asia with NYSE shares.
15. The Tax Haven Bank Short Sale: Small (usually Caribbean) banks act as
agents for their clients unwilling to reveal their identity. The client
wants to buy stock. The bank doesn't buy the stock on behalf of the client.
They simply show the sale within the bank's accounting system. This
practice extends to gold etc.
16. The Lost Certificate Short Sale: Client requests share certificate.
Broker sends it certified to the slightly wrong address. It's returned to
broker. Using the certified receipt broker claims the client has the share
certificate. A year is spent in proving it never arrived. Meanwhile the
broker has the share certificate and can use it to cover other short sales.
This happened to me in Vancouver.
17. The Margined Short Sale: Buyer buys stock on margin. They can't take
physical delivery of their share certificates. The broker sells the
margined account non-existent stock (a short sale).
18. The Takeover Short Sale: Brokers add non-existent stock into a takeover
with stock transaction. The buyer pays for the non-existent shares. The
short seller gets cash or stock in the buyers company.
19. The Attrition Short Sale: For OTC stocks about 3% of the beneficial
owners of the stock disappear each year. They die, forget they own the
stock, etc. Brokers can safely sell short 3% of the float each year relying
on the fact that the beneficial owners will never claim their stock.
20. Counterfeit Stock: Professionals regularly send counterfeit share
certificates to Transfer Agents. A surprising percentage are accepted as
real share certificates. The result is the professional effectively has
sold short the shares involved in the certificate.
21. Issue Depository Receipts without holding the stock and sell the
Depository Receipts.
22. The Warrant or Option Short Sale. Buyer holds the right to exercise
warrants or options, but doesn't do so. Instead, they sell short the stock
and use the options or warrants as insurance. This was popular among VSE
underwriters in the 1980s-1990s
23. Reg S Short Sale. Same format as the Warrant or Option Short sale, but
using cheap Reg S stock. The short seller is exposed for one year.
24. The Lending Short Sale. This was used by the guy who introduced me to
the business. You offer to lend 90% of the face value of the stock to the
borrower for a long period of time. Your interest rate is better than that
of a bank. You take in the stock and sell it. You lend 90% of the proceeds
from the sale. You are now short the stock. You collect your interest
payments until the borrower defaults on the loan.
To contact the author: Visit the Beowulf Investments website: [http://home.earthlink.net/~beowulfinvestments/] Or, visit the Global Village Investment Club Website:
[http://home.earthlink.net/~beowulfinvestments/globalvillageinvestmentclubwelcome/]
About the Author
He has been the Managing Director of Beowulf Investments [http://home.earthlink.net/~beowulfinvestments/] since 1981 and is the Executive Director of the Global Village Investment Club [http://home.earthlink.net/~beowulfinvestments/globalvillageinvestmentclubwelcome/]