What is short selling (securities financing) in US stocks?

Securities financing is one of the most basic ways of short selling in the US stock market, which is the opposite to the long position. When an investor believes that the price of a stock will fall but does not own the stock, the investor can borrow shares of the stock from Long Bridge using a certain amount of funds (margin) in their securities account as collateral and sell it.

How do I profit from short selling (securities financing)?

After selling the shares, the investor waits for the price to drop and then buys back the same quantity of the shares at a lower price. After returning the borrowed shares to Long Bridge along with interest, the investor earns the difference between the high selling price and the low buying price.

What account can be used for short selling (securities financing)?

As short selling (securities financing) involves margin collateralization, only margin accounts support short selling (securities financing), while cash accounts do not currently support short selling (securities financing).

What are the requirements for short selling (securities financing) in US stocks?

Short selling (securities financing) of U.S. Stocks have the following requirements：

1. Ensure that you have opened a Longbridge Integrated A/C (margin account);
2. Your account has enough buying power (account assets > initial margin required for securities financing);
3. The stock is eligible for short selling through Long Bridge.

Note：

• Short selling (securities financing) in US stocks is a type of margin trading. Margin trading can only be conducted if the total assets in the account are greater than or equal to the initial margin required for borrowing an individual stock. If the total assets in the account are less than the margin requirement, it is not possible to conduct short selling (securities financing).
• Each stock that supports short selling has different initial margin requirements due to different margin ratios. The specific margin ratio can be viewed on the details page of the individual stock that supports short selling (securities financing).
• Buying power can be increased by depositing cash or stocks that can be used as collateral.
• During margin trading operations, Long Bridge calculates the risk management value of the account in a certain way. When the overall risk management value of the account is too low, it may result in forced liquidation of some positions.

Under what circumstances will a margin call be triggered after short selling (securities financing)? When will there be a risk of forced liquidation?

When the price of the short-sold stock increases, the net asset value of the account may fall below the required maintenance margin, triggering a margin call.

In general, the account may be subject to forced liquidation at any time when the net asset value falls below the maintenance margin level or when the deadline for margin call expires. Long Bridge will determine the forced liquidation price based on actual market conditions. If facing high market risk, the account may be forced to liquidate at any time.

How do I know which stocks can be shorted?

You can go to the individual stock details page and check the supplementary information in the upper right corner. If it includes "Support Shorting", it means that the stock can be sold short. After tapping into the Margin Information page, you can also view specific information such as the required margin for shorting, interest rates, short pool quotas, etc. The list of stocks that support short selling may be adjusted from time to time depending on company policies and market risks.

What are the fees for short selling (securities financing)?

There are two types of fees that can be incurred during a short-selling operation.

The first is the commission, platform fees, and third-party fees incurred when buying and selling stocks. These fees are the same as the trading fees for long positions in the same market.

The second is the margin interest that needs to be paid if the borrowed stocks are sold but not bought back to close the position within the same trading day. The margin interest rate may vary for different stocks, and the specific rate can be viewed on the margin information page which can be accessed by tapping on the stock details page.

What is the interest rate for short selling (securities financing) in US stocks? How is it calculated?

The interest rate for securities financing = Daily quantity of short-sold stocks that have been settled * [(Closing price * 102%) rounded up] * The reference interest rate for short selling / 360.

Note：

• The interest for securities financing is calculated daily and deducted at the end of the month;
• Both the reference interest rate for short selling and closing prices may fluctuate, so the final settlement of the margin interest is calculated based on the reference interest rate for short selling after daily settlement. For specific charges, please refer to the monthly statement.
• The reference interest rate for short selling may vary for each stock at different times. Please check the individual stock details page for specific information.

When does margin interest begin to accrue for short-selling US stocks?

The US stock market settles trades on a T+1 basis. Margin interest begins to accrue after the completion of the stock settlement, and the interest will be cleared at the end of the month. Note: Interest will not be deducted on a daily basis during the short-selling period, but it will be calculated daily and affect your buying power. Therefore, please ensure that there is sufficient margin in your account.

What are the collateral rules for short selling?

After a client completes a short selling transaction by borrowing shares from a broker and selling them, the system will automatically calculate a collateral amount to ensure that the client has the ability to repay the borrowed shares at any time. The collateral amount is equivalent to the real-time market value of the borrowed shares in cash, collected in the form of margin to guarantee the return of the shares.

The collateral amount required for closing out a short position is not included in your cash buying power. If there is a debit balance remaining after the collateral is deducted from your cash balance, interest will begin to accrue on the outstanding amount.

Does short selling affect the credit limit?

If a client does not have sufficient cash and wishes to short sell, the broker will lend the client money to conduct the transaction. This will use up the credit limit. Here are two examples to illustrate this:

Example 1

A client has a long position in US stocks with sufficient buying power, but no cash;

They short sell 1 share of AAPL.US at $130 per share, and the initial margin requirement is $50, which means the broker lends the client $50 to short sell the stock. This will use up $50 of the credit limit.

Therefore, the broker lends the client $50 for the short selling, which will use an extra $50 of the financing limit.

Example 2

The client has a long position in US stocks with sufficient buying power, and has $100 cash; They short sell 1 share of AAPL.US at $130 per share, and the initial margin requirement is $50. The client's $100 cash is sufficient to open the position without borrowing from the broker, so it will not use up the credit limit.

How do I short sell US stocks?

You can go to the trading interface, select "Sell", and you will see how many shares that are "Shortable" below the input quantity. Then you can enter the short selling quantity according to the shortable amount and submit your order directly.

How to reverse from a short position to a long position？

You need to first close the short position (i.e., buy back the shorted shares), and then place a new buy order. For example, if you have a short position of 200 shares of BABA, you need to buy back all 200 shares first before placing a new buy order. If you try to buy 400 shares directly, the order will fail.

What are the precautions for short selling US stocks?

1.Not all US stocks can be shorted.

Not all US stocks can be shorted, and not all US stocks can be shorted at all times. Some stocks with very low prices or poor liquidity are not allowed to be shorted. For those stocks with poor liquidity, even if the order is successfully placed, there may be a situation where the stocks cannot be borrowed during the transaction, and therefore short selling such stocks may not always be available.

2.A stock cannot be both long and short at the same time. Please be aware of this restriction when placing orders, including conditional orders.

It is not possible to simultaneously hold a long position and a short position for the same stock in the same securities account. When you hold a stock and short sell the same quantity of that stock holdings, it will be considered as closing the position. If you sell more than the quantity you hold, the order will fail. If you need to perform the opposite operation, you need to close the position first (i.e., sell the holding shares) and then place a new short selling order. For example, if you hold 200 shares of BABA, you need to sell the 200 shares first before placing a new short selling order. If you directly sell 400 shares, the order will fail.

Conversely, if you short sell a stock and then try to buy more shares than the short position, the order will fail. You need to first close the short position (i.e., buy back the shorted shares), and then place a new buy order. For example, if you have a short position of 200 shares of BABA, you need to buy back all 200 shares first before placing a new buy order. If you try to buy 400 shares directly, the order will fail.

3.If there is a dividend payment during the short selling period, the borrower (short seller) needs to pay the stock dividend to the lender

Although the short seller sells the stock in the market, the ownership of the stock still belongs to the lender, and the corresponding dividend also belongs to the lender. As a result of the stock lending, the lender loses the opportunity to receive the dividend, and therefore the short seller should pay the dividend. If there is a dividend payment during the short selling period and the short seller still holds the short position one trading day before the ex-date, Long Bridge will deduct the corresponding amount from the short seller's account on the dividend payment date (the actual equity remains unchanged, as the stock price will drop after ex-right and the short position will increase by the same amount of paper profits, offsetting each other). However, if you do not want to pay the dividend, you can close your position one trading day before the ex-date.

What are the risks of short-selling (securities financing) in US stocks?

1.Asymmetrical Risk and Reward.

The asymmetry between risk and reward is an inherent risk of short-selling. Theoretically, when an investor buys a stock, the maximum potential loss is the stock price dropping to zero, which equals a loss of 100%. However, when an investor short sells a stock, the potential loss is unlimited as the stock price could continue to rise, potentially resulting in a loss of 200%, 300%, or more.

2.Time Cost.

Time factor must be taken into consideration when selling short. On the one hand, short selling incurs interest costs every day, which accumulate over time. On the other hand, the greatest uncertainty in short-selling comes from time. If investors hold a short position for a long time, they may have to endure losses caused by fluctuations in stock prices.

3.Interest Rate Risk.

After placing a short-selling order, the interest rate remains variable. The interest that investors ultimately pay is calculated based on the actual interest rate for each day from T+1 and is settled monthly. No one can predetermine the short-selling interest rate. If the short-selling demand for a stock significantly increases during the period when investors hold its short position, it may lead to a substantial increase in interest rates, and investors will have to bear the increased short-selling costs. In some cases, this may result in losses in the short position.

4.Corporate Actions.

Some corporate actions (such as mergers, acquisitions, dividend payments, etc) may increase short-selling costs. For example, when a company announces a dividend payment, it usually reduces the supply of the shares in the market, which may lead to higher short selling costs.

5.Delisting and Suspension.

When a stock is delisted or suspended from trading, investors may not be able to cover their short positions because the stock cannot be traded. However, the securities financing activity is still recorded and it can only be terminated when the delisting process is completed or trading is resumed. This process may take several days, months, or even longer, especially when the company undergoes bankruptcy liquidation. During this period, investors have to continue to pay securities financing fees based on the delisting price or the price of the latest trading day, which can sometimes be very high.

6.Stock Return

The Company shall be entitled to, either at its own discretion or at the request of a Third Party, terminate any such lending and borrowing arrangements and immediately call for the delivery or return of the underlying Investment Products. The Client must comply with any demand calling for the delivery or return of the underlying Investment Products.