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The problem that "shorty" aka me faces with

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TraderGash   Monday, 12/08/14 04:52:45 PM
Re: 236T568 post# 39
Post # of 9405 
The problem that "shorty" aka me faces with a forward split has nothing to do with borrows, as you have rightly pointed out. If my broker has secured a borrow of 1000 shares, those 1000 shares will become 3000 shares after the split, so there is no issue.
The problem for shorty is that for each penny stock under $2.50 that you borrow at a broker like interactive brokers, you have to put up $2.50 in margin. So if I am short 1000 shares of CANK before at the current pps before the split, I need to put up $2,500 in margin. Once the split occurs, my broker will want $7,500 in margin. This makes shorting CANK less desirable, and may result in existing short positions being covered to avoid this situation.
Overvalued companies that are being promoted often dump right after the forward split. I believe that planning a forward split during a promotion adds to the profits of the insiders as it scares shorts away, leaving a greater percentage of profit to the insiders.

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