Hard to borrow and locates
A hard-to-borrow stock is one your broker cannot lend you freely to sell short. Before any short sale, Regulation SHO requires the broker to have reasonable grounds to believe the shares can be borrowed, a locate. On hard-to-borrow names that locate is limited and often costs a fee per share, on top of a yearly borrow rate.
Why it matters to a small-cap momentum trader
The small caps that spike are exactly the ones with the fewest shares to lend: low float, heavy retail ownership, and shorts who are already in. When a low-float runner starts to fade, the short side is crowded, and the locate can cost more than the move you are trying to catch. Knowing the borrow status and the price of a locate before the fade starts is the difference between a planned short and one you cannot place.
The rule
Locate (Reg SHO Rule 203(b)(1)). Before a broker accepts a short sale in any equity, it must have reasonable grounds to believe the security can be borrowed so it can be delivered on the date delivery is due, and it must document that locate before the sale. Market makers doing bona fide market making are excepted.
Close-out (Rule 204). If a short sale fails to deliver, the clearing firm must close it out by the start of regular trading on the settlement day after the settlement date.
Threshold securities. A stock with fails to deliver of 10,000 shares or more, at least 0.5% of its shares outstanding, for five settlement days in a row goes on the threshold list, and borrowing gets tighter still.
Easy, hard, or none
- Easy to borrow. The broker has plenty of shares to lend; you can short without asking.
- Hard to borrow. Shares are limited. You request a locate for a size, the broker quotes a price, and you accept it before you short.
- No shares to borrow. Nothing to lend at any price; the stock cannot be shorted that day.
Brokers that charge for locates usually quote them per share for the day. Separately, a short position held overnight pays a borrow fee, quoted as a yearly rate on the value of the position and charged daily. On hard-to-borrow small caps that rate can be very high.
Borrowing in Hindsight Markets
The Level 2 header shows the borrow status beside the symbol: S for easy to borrow, HTB for hard to borrow, NTB for no shares. Hover it to see the fee and the shares available as of that time. Where the replay requires a locate, a short on a hard-to-borrow stock is refused until you buy one in the Short locate window, at a price set at the moment you accept.
A worked example: what a hard-to-borrow short costs
An illustration with made-up numbers, not a real stock, broker or day.
The locate. You want to short 1,000 shares at 4.00. The locate is quoted at 0.03 a share: 1,000 × 0.03 = 30 dollars, paid whether or not you use it.
The trade. You short at 4.00 and cover at 3.80. Gross profit = 1,000 × 0.20 = 200 dollars. After the locate, 200 − 30 = 170 dollars, before commissions.
Held overnight. At a borrow rate of 50% a year on a 4,000-dollar position, with a 360-day year, one day costs 4,000 × 0.50 ÷ 360 ≈ 5.56 dollars.
The break-even. The 30-dollar locate alone needs a move of 0.03 a share in your favour before the trade makes anything.
Common mistakes small-cap traders make with hard-to-borrow stocks
- Locating after the fade starts. Supply runs out fast once a runner turns. Price the locate while the stock is still going up.
- Ignoring the locate in the risk. A locate is a cost paid up front. A small target on an expensive locate can be a losing plan before the first fill.
- Forgetting SSR. A stock that has already fallen 10% is under Rule 201, so a short can only fill above the bid. Borrow and SSR together can make a short impractical.
- Holding a hard-to-borrow short overnight by accident. The daily borrow fee, and the risk of a recall, make an overnight short on a small cap expensive.
Common questions
- What does hard to borrow mean?
- Your broker has few or no shares of that stock to lend, so you cannot short it freely. You need a locate for the size you want, often for a fee, and the supply can run out.
- What is a short locate?
- The broker's confirmation that shares can be borrowed for your short sale. Regulation SHO requires one, documented, before the short is placed. On hard-to-borrow stocks many brokers sell locates per share for the day.
- How much are hard-to-borrow fees?
- They vary by stock, broker and day. The borrow fee is a yearly rate charged daily on the value of the short, and on hard-to-borrow small caps it can run far above the rate on easy-to-borrow stocks.
- Can you short a stock with no shares to borrow?
- No. Without a locate a broker cannot accept the short sale, apart from the narrow exception for market makers. Shorting without a borrow is naked shorting, which Regulation SHO is built to prevent.
- Can a stock go from easy to hard to borrow during the day?
- Yes. When many traders short a runner, the broker's lendable supply can run out and the stock moves to hard to borrow, or to none, within the session.
How to practise it in Hindsight Markets
- Open a past trading day and find a low-float runner on the Small Cap Low Float Top Gainers scan.
- Read the borrow letter in its Level 2 header and hover it for the fee and the shares available.
- Open the Short locate window, type the symbol and a share count, and press Quote. It answers with an offer, or says the replay does not require a locate.
- Accept a locate only if the cost fits the trade, then short the fade with a stop above the high.
- Open the trade in the journal and weigh its result against what the locate cost.
Practice this on a real past day in Hindsight Markets
Replay a day when a hard-to-borrow small cap faded, price the locate at that moment, and decide whether the short was worth what it cost.