DEFINITION of ‘Hard-To-Borrow List’
An inventory used by brokerages to indicate securities that are unavailable for borrowing for short sale transactions. A brokerage firm’s hard-to-borrow list provides an up-to-date catalog of securities that cannot be shorted. The security may be on the hard-to-borrow list because it is in short supply or because of its volatility. In order to enter a short sale, a brokerage client must first borrow the shares from the broker. To provide the shares, the broker can use its own inventory or borrow from the margin account of another client or from another brokerage firm.
BREAKING DOWN ‘Hard-To-Borrow List’
Investors who enter short sale transactions attempt to capture profits in a declining market. For example, an investor may think that stock ABC will drop in price in the future. The investor can short stock ABC and, if the price drops as he or she anticipated, buy to cover for a profit. If the stock rises, however, the investor will lose money.
The hard-to-borrow list is updated on a daily basis. In order to enter a short transaction, the broker must be able to provide, or locate, the shares to loan to the brokerage client making the short sale. Regulation SHO, implemented on Jan. 3, 2005, has a “ocate”condition that requires broker to have a reasonable belief that the equity to be shorted can be borrowed and delivered to a short seller. The regulation is intended to prevent naked short selling practices.
While a brokerage firm’s hard-to-borrow list is typically an internal list (and one that is not available to clients), the firm’ clients generally have access to the easy-to-borrow list. Brokerage clients may have to pay hard-to-borrow fees on certain short sales.
The hard-to-borrow list is the opposite of the easy-to-borrow list which is an inventory of securities that are available for short sale transactions. In general, an investor can assume that a security that is not included on the hard-to-borrow list will be available for the purposes of short selling.