Why does brokerage firm lend stocks to you for short sell when they themselves can play the same trick?

future firm
boxer111 asked:

Why do they do so when normally they have greater expertize than you-to guess the future drops? Is it that they do this ONLY when THEY don’t sense any future falls, and that-is-why they lend you cause it is you who are taking the risk and they will anyhow get their share of money even if you fail. In situations when they also sense the future fall, will they give you the shares then also, for short selling when they themselves can do the same for complete profit.



Comments (5)    Posted in Investing    

Subscribe RSS 2.0 feed. Leave a response, or Trackback from your own site.




5 Responses to 'Why does brokerage firm lend stocks to you for short sell when they themselves can play the same trick?'

  1. andrew f - May 9th, 2009 at 11:14 pm

    They do it because it is a rule established by almost every stock market, that anyone short-selling has ‘access to’ a matching amount of shares.

    If they didn’t, it is possible that many times more shares would be short-sold than shares exist. If this happened, it would violate the integrity of the market, as those selling shares (short) might not be able to deliver to the person who purchased the share in good faith, expecting the short-seller to be able to deliver the share.

    Expected price movement of the share is irrelevent.

  2. Roy P - May 12th, 2009 at 11:34 pm

    You can never know with certainty the direction the stock market will take

    Paraphrased from “The Intelligent Investor” by Benjamin Graham

  3. dredude52 - May 15th, 2009 at 3:35 pm

    Two separate functions and departments. Most brokerages have a Trading Department with allocated funds for investing in stock. That said, most brokerages are not market timers. Like almost all mutual funds, they are always “in” or “long” the market. Sure they rotate their holdings, but they rarely go short. There are some specialty funds that go short, but in general, most do not.

    I saw a list of the top 100 mutual funds in the nation, and the smallest one managed $82 billion. Can you imagine what would happen if they sold all of their stock and went short? The market would crater. They can’t go short because of their size, even if they knew how or had the “greater expertize.”

    You’ve made a grave assumption here: that brokerages know more than you do about market direction. Nobody has a crystal ball and nobody “predicts” anything. All any trader can do is to increase their odds of a profit, and manage risk.

    Now, “Why does brokerage firm lend stocks to you?” Because they have to, or you would go somewhere else and borrow it. Just like the Specialist and certain floor traders, their function is to provide liquidity; their job is to provide a market. When you want to trade, someone must step up and take the other side, without front-running you. That’s their job and their function. It doesn’t matter what the market is doing or what they would like to do or even whetehr they got some pussye that mornin’. They gotta trade with you and lend you the stock. Just make sure you short on a downtick.

    That’s why I like to trade the ETF’s (Qubes, Spyders, and Diamonds) or the stock index futures: no borrowing and no downtick rule. Just sell it.

  4. NotEasilyFooled - May 18th, 2009 at 4:19 am

    Brokers don’t have any better idea than you do about when share prices are going to drop.

    The brokerage firms make money from your short sale, because (1) they charge commissions on the sale, (2) they charge commissions when you cover the short and (3) they earn interest on the sales proceeds of the shorted shares from the time of the short until the time you cover the transaction.

  5. Frank Castle - May 18th, 2009 at 11:08 am

    Brokerages don’t have a crystal ball in their basements and they cannot know if the shares are going to rise or fall.


Leave a Reply