Why does my broker allow me to enter only day orders for short selling?

By Chad Langager AAA
A:

Put simply, brokerage firms restrict short sales to day orders because of the complexity of the short sale transaction and the difficulty in authorizing shares to be short sold in a rapidly changing environment.

Long-term orders can be placed when an investor is going long because all he or she is doing is buying a security. The long investor's order is placed once the security becomes available or once the conditions of the trade are met. But short sale transactions are more complex. Several extra steps must be taken before the trade becomes effective. A short sale involves the selling of borrowed shares that must first be confirmed to exist. Once this has been established, the shares are sold on the market and the proceeds are deposited in the short seller's account. (To learn more about short sales, see our Short Selling Tutorial.)

It is because of the fluctuations in brokerage inventories that only day orders can be used in short sales. When an investor places a short sale order, the brokerage firm takes the shares out of its inventory or out of a client's margin account, or it borrows shares from another brokerage firm, and then it sells them on the market. However, the constant change in positions in and out of securities by all three of these sources for shares means that the firm must make sure that the shares are available for lending. Once the shares are confirmed and authorized to be short sold, the short sale transaction will be completed. However, if the shares cannot be confirmed within the trading day, the order is canceled and the short seller will have to re-enter the order the next day.

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