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[BigBake1]

There are several reasons why one cannot short OTC securities in an effective capacity like an exchange security. First issue you run into is the shares to borrow, unlike exchange traded securities the majority of the 10,000 tickers quoted on the OTC 99% of them have no institutional investors or positions held by brokers. Do you still see shorts on OTC securities? Yep.. but very small positions unless it is of course that 1% where you may see significant short interest develop. Occasionally even a security like LOTE for example did in fact have a rather significant position against it, thus why it popped up so high. Of course it eventually fell apart after the Forward Split when a flood of shares hit the market.

The primary reason why you do not see significant short positions here in the OTC is “COST”, it is very expensive to short securities quoted here in the OTC. Maintenance Margin requirements from FINRA make it prohibitive to buy a large short position on these securities, thus why it is usually seen on the higher price ranged securities quoted here. At $2.50 per share on anything selling for less than $5 per share can add up very quickly, especially on sub penny securities. This is why you will not see significant short interest in the OTC.

(c) Maintenance Margin
The margin which must be maintained in all accounts of customers, except as set forth in paragraph (e), (f) or (g) and for cash accounts subject to other provisions of this Rule, shall be as follows:

(1) 25 percent of the current market value of all margin securities, as defined in Section 220.2 of Regulation T, except for security futures contracts, "long" in the account.
(2) $2.50 per share or 100 percent of the current market value, whichever amount is greater, of each stock "short" in the account selling at less than $5.00 per share; plus
(3) $5.00 per share or 30 percent of the current market value, whichever amount is greater, of each stock "short" in the account selling at $5.00 per share or above; plus
(4) 5 percent of the principal amount or 30 percent of the current market value, whichever amount is greater, of each bond "short" in the account.
(5) The minimum maintenance margin levels for security futures contracts, "long" and "short", shall be 20 percent of the current market value of such contract. (See paragraph (f)(10) of this Rule for other provisions pertaining to security futures contracts.)
(6) 100 percent of the current market value for each non-margin eligible equity security held "long" in the account.

So take your favorite sub penny trading at .005 for example, to short it in a manner that will result in profits of a meaningful realized gain you will have to purchase at least 500,000 shares, in Maintenance Margin you are going to tie up $1,250,000 in capital… Not going to happen, that is why you often see very small positions on these securities, less than few tens of thousands. Sure during big runs you may see a decent position develop, YIPI last year is a good example of where the Short Interest grew as the PPS swung up through $1 on it’s way to a high of $2.40. what normally would have a position of 30-40,000 shares was up to 200,000+ shares. Now it wasn’t a single position, it was multiple customers all taking shots at the inflated PPS. Still a drop in the bucket at 2.5% of the OS at the time.

Shorting OTC securities is fraught with some major pitfalls, LOTE was a good example, I am certain a lot of people lost their ass on that one when it continued all the way up to $24. This demonstrates that going short is not something to be taken lightly. The losses have no end and the gains can only be 99% on such a position, along with other factors, borrowing shares costs money, so besides Maintenance Margin one has to pay a premium to borrow the shares and those shares can be called back at anytime.

Some common myths about shorts in the OTC:

1. MMs can short the security without paying Maintenance Margin…… FALSE.. FINRA had to go to great lengths to define customer after way too many conspiracy calls about MMs not having to pay the same $2.50. The term customer had to be defined in rules because they got tired of the idiots. There is an actual Notice that was filed years back to define Customer and of course the Rules are now updated with the definition:

(3) The term "customer" means any person for whom securities are purchased or sold or to whom securities are purchased or sold whether on a regular way, when issued, delayed or future delivery basis. It will also include any person for whom securities are held or carried and to or for whom a member extends, arranges or maintains any credit. The term will not include the following: (A) a broker or dealer from whom a security has been purchased or to whom a security has been sold for the account of the member or its customers, or (B) an "exempted borrower" as defined by Regulation T of the Board of Governors of the Federal Reserve System ("Regulation T"), except for the proprietary account of a broker-dealer carried by a member pursuant to paragraph (e)(6) of this Rule.

Customer Includes
The term “customer” includes a broker or dealer, member and their
partners, officers or associated persons whenever the carrying member
extends, arranges or maintains any credit on their behalf.

The only time it will not include a broker or dealer is when they are purchasing or selling for a customers account, otherwise anytime any entity purchases or sells for their own account they are a CUSTOMER.


2. Set a GTC order of over $1 so that your shares in a cash account cannot be borrowed…. FALSE.. Shares cannot be borrowed from Cash Accounts because they are already OWNED, so where do they borrow the shares from?

Where does the brokerage firm get the securities to loan to the short seller? The securities loaned can be obtained from several sources. The most common source is other customers that are long the security in their margin accounts. The second most common source is the firm's own inventory, third is securities borrowed from another brokerage firm, and forth is securities borrowed from institutional investors.

Obviously the 4th rarely applies to the OTC.

3. Shorts do not have to cover their position ever if they so wish, they can sit and wait until the price plunges….. FALSE… Read the agreements, it is on every written contract that at anytime the position maybe called in:

Regardless of where the borrowed securities are obtained, the lender always reserves the right to demand that the securities be returned upon demand at any time. Thus, one risk of short selling occurs when the lender demands the loaned security be returned immediately, and other securities cannot be borrowed for a substitution. Since the short-seller has no control over this timing, he might have to buy the security at a higher price (thus a loss) in order to deliver it back to the lender.

4. Shorts have shorted this from $1 to .0001…. FALSE… The maximum realized gain that one can achieve is 99%, the additional .XX of a percent are meaningless and result in no further gains for the short position. At .01 the maximum has already been achieved if the security were in fact shorted from $1, and nobody would be paying the high costs of borrowing to achieve 99.9999%, in Fact rarely does anyone hold on for 99% gains because of all the costs associated with such a position, much like regular long position traders they seek the same 20-30% gains and then to move on. Imagine the Maintenance Margin being tied up for many months even a year or longer…Not going to happen.

5. Shorting an Illiquid Security…. Uhhh yeah… Just like regular trading you must have liquidity in order to execute the trade and a short position is no different than a long position. That is why you see on the Short Interest report the number of days it would take to cover such a position. Hilarious reading the claims on illiquid securities about how it was shorted to death and a massive position exists yet it trades no volume for days, weeks and months….lol.

There are many others but these are the prominent ones you will see here on Ihub, but the bottom line is this, it is sometimes very difficult to short exchange traded securities at times, the borrow becomes impossible especially on bad news and the premiums go through the roof. Certainly there are manipulative occurrences on exchange traded securities because of their massive volume and liquidity at times hide such practices for a period of time. Unlike the OTC Marketplace which is an “Illiquid” Market with very short period of liquidity in a few securities at a time. Paper transaction reports are still used in the exchanges, the OTC however is completely electronic from trade inception to clearance and settlement, no human intervention, making it much more difficult to manipulate.


Can you see a substantial short position on a sub penny security? Yep, financiers who are issued large blocks of shares will sometimes hedge against their own block of shares. I have seen a 50 million share block shorted on a .0002 security, the financier knew the security was being bled out so they hedged against the impending dumpathon. It rarely happens, but it is just one of the many ways in which financiers can make a buck here in the OTC.