Short Selling I can only speak with minor authority about...

Short Selling

I can only speak with minor authority about Ireland/EU short selling {I am an Aussie living in Dublin}, however I recall that most ‘advanced share markets’ around the world (including Australia) implemented similar guidelines to those outlined below.

Since about 2008 “Naked Short Selling” - selling shares without owning them is illegal in USA and EU, it was partially or fully restricted in Japan, Australia and India.

The mechanics of a “Short transaction” is that someone wanting to borrow stock goes through a 3rd party intermediary (helps to avoid capital gains tax) who then borrows stock off an Institution that owns/holds the target stock.

The Shorter wanting to borrow the stocks will make an upfront payment for the market price of the stock plus a commission payment to actual Owner of 2.5% - 4.5% - but everything in life is negotiable. So the Shorter may pay upfront 104.5% of todays price to “own the stock” for a period of time.

The actual Owner of the stock is making easy, virtually risk free money by lending them out. The account balance is monitored daily and the owner can apply a Margin call on the Shorter if needed.

The ‘Shorter’ sells the shares at the current price in the hope of purchasing the shares back at a discount in the future to then return the shares to the ‘Owner’ and pocket the difference as profit.

It could be the Shorter has borrowed the stock for a 3 month period or negotiated period of time so T3/T2 settlement is irrelevant to Short transactions.

The Shorter can return the stock on 24 hours notice. The Owner can ask for the stock to be returned in a “timely manner” but cannot demand immediate return.

In the EU It is mandatory that "Short Trades" be reported to the local Exchange, but I think they have some days grace before the transaction needs to be reported. My guess is somewhere buried in ASX there is an accurate rear facing report available.

Above is probably a pretty close approximation of what goes on, but of course I’d welcome any corrections.