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Duration: 6:35

Instructor:

Contributor: Interactive Brokers

Level: Advanced

In a normal short sale transaction, Interactive Brokers does not arrange to borrow stock on the client’s behalf until settlement, also known as T+2. In the case of a preborrow, Interactive Brokers will attempt to borrow stock on the client’s behalf the day the pre-borrow request is submitted.

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Study Notes:

In a normal short sale transaction, Interactive Brokers does not arrange to borrow stock on the client’s
behalf until settlement, also known as T+2. In the case of a pre-borrow, Interactive Brokers will attempt
to borrow stock on the client’s behalf the day the request is submitted.

Because Interactive Brokers, like other broker dealers, generally does not borrow stock until settlement
date, there is a possibility that, come settlement date, IB is unable to borrow sufficient shares. On those
rare occasions, per SEC regulations, this failure to deliver may result in a client’s short being closed out.
By pre-borrowing a stock the client, and IB, reduce the likelihood of a failure to deliver, thus reducing
the likelihood of a client’s short being closed out. There is no formula, however, for when a client should
pre-borrow a stock. It is purely up to the client’s discretion.

The primary benefit to pre-borrowing, as described earlier, is first and foremost the reduction in the
probability that a short will be closed out. A supplemental benefit is that a pre-borrow can also actively
locate and provide the client greater flexibility when entering short sell orders. Any pre-borrowed shares
that do not have an offsetting short position will automatically be returned after one settlement cycle.

Because a borrow to cover a short sale is not required until settlement date, by pre-borrowing the client
is electing to pay the financing cost on a borrow earlier than required. Once the pre-borrow request has
been executed, the client will begin paying the borrow cost that day, plus a $20 borrow fee per executed
pre-borrow. Although pre-borrowing shares reduces the probability of a closeout on settlement date, it
does not guarantee a closeout cannot occur. Keep in mind that the potential closeout protection offered
by pre-borrowing will only apply to new shorts. Existing short positions may still be exposed to third-party buy-ins.

Further, as described earlier, pre-borrowing is a tool generally used when borrowable liquidity is not
ample. As a result, IB is not always able to satisfy all pre-borrow requests. Entering a pre-borrow request
does not guarantee the client will receive a pre-borrow.

Finally, the indicative fee rates displayed on TWS are not necessarily the rates at which stock will be
borrowed. Rates are subject to change

Prior to executing a pre-borrow, clients must enroll in the pre-borrow program, which can be achieved
via the Account Management website. Please navigate to, Settings – Account Settings. In the Trading
Permissions section, click on the gear icon to the top right. A new page displays with “Trading
Permissions.” In the Trading Programs area, locate and click on “Pre-borrow Program” and then
“Submit”.

There is no cost to enroll in the program and enrollment is generally effective on the next business day.
Keep in mind, that enrolling in the program only allows clients to enter pre-borrow requests. The
program does not mean that all future short sales will trigger pre-borrows.

Trade entry of pre-borrows is done by the client in TWS. To enter a Pre-borrow, right-click on the
symbol, scroll to Trade and click on Pre-borrow Shares for Shorting. A stock loan/borrow screen comes
up. A notification will pop up stating that pre-borrow orders are market orders, asking to convert the
order from a Limit order to a Market order. This simply means that the account pre-borrows at the
mark price, which is 102% of the closing price rounded up to the nearest point. That is the amount of
collateral that borrow fees will be charged upon. Keep in mind that pre-borrowing is not selling short.
If you would like to pre-borrow, please click “Yes” at the prompt. Enter the desired quantity and click
“Transmit.” Pre-borrow limit orders at custom marks or rates are not supported.

To be eligible for the program, the account must be a Portfolio Margin account. The pre-borrow
marketplace is open from 6:45amET to 2:45pmET. Pre-borrow requests must be for a value of at least
$10,000. The program only applies to US and Canadian equities.

After executing a pre-borrow the client will be able to see the details in their daily statements, including
the number of shares pre-borrowed, collateral value and any associated fees and interest. Keep in mind
that statements display stock loan information on a T-1 basis. This means that a Friday statement will
display interest and fees as of Thursday. The date used to calculate fees and interest can be seen in the
“Value Date” column in the Securities Pre-borrowed statement section.

The TWS Private Locate column will display executed pre-borrows in real-time.

In summary, pre-borrowing is another tool at the client’s disposal. While not applicable in every
situation, pre-borrowing can offer greater confidence and flexibility when short selling. Please refer to
the Interactive Brokers website for a more detailed overview of the program and feel free to reach out
to customer service with any additional questions.

Disclosure: Interactive Brokers

The analysis in this material is provided for information only and is not and should not be construed as an offer to sell or the solicitation of an offer to buy any security. To the extent that this material discusses general market activity, industry or sector trends or other broad-based economic or political conditions, it should not be construed as research or investment advice. To the extent that it includes references to specific securities, commodities, currencies, or other instruments, those references do not constitute a recommendation by IBKR to buy, sell or hold such investments. This material does not and is not intended to take into account the particular financial conditions, investment objectives or requirements of individual customers. Before acting on this material, you should consider whether it is suitable for your particular circumstances and, as necessary, seek professional advice.

Supporting documentation for any claims and statistical information will be provided upon request.

Any stock, options or futures symbols displayed are for illustrative purposes only and are not intended to portray recommendations.

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