There are brokers that do allow people to short pennies, there is nothing illegal about shorting pennies, the reason most brokers don't allow it is because pennies don't trade on an exchange, they trade on a "listing service" aka the OTC markets. It's very hard for brokers to get shares that are available to short, and when they do find them, it's usually very very very small numbers for most stocks, so it really isn't even worth it. Anyone who claims that pennies are heavily shorted simply has no clue what they are talking about, nor how the system actually works. One of the most common things people do on I Hub is post the "daily short list" and use those numbers to "show" people how many shares are short on a penny stock. The problem with that list is, it doesn't just have the shares short for a stock, but also MANY other normal trades that aren't "short sells" at all but get marked as being "short" due to how the MMs record the trade. So basically that list is completely useless for telling how many shares are short on a penny stock.
I use a broker that allows you to short pennies, so I know exactly how it works. For a stock like ABOT, there might be a few 100,000 shares out there that you could get to short, and it's a first come first serve system, so you have to request and hope you are up in the front of the line. If you get any shares, it's going to be a very very small amount. On top of all of this, if you hold these shares short over night, you get charged $1 per share per night. So if you hold 50k shares short over night, you get charged 50,000 dollars. So that forces anyone who shorts these with most of the brokers out there that even allow it to cover the same day, something that is not easy to do and makes this whole process even riskier.
Then, to even get the shares short, you have to have $2.50 of buying power per share you get. SO if you want to short say 10,000 shares of ABOT, you have to risk 25,000 of your margin to get those 10,000 shares, even though 10,000 shares only costs like around 500 bucks at these prices, if you short it you have to basically risk 25,000 for those 10,000 shares... This alone really makes shorting pennies not even worth it, and this is something that is universal across all brokers that allow shorting of pennies.
And to respond directly to the claims that were made about "naked shorting", the only people that can legally naked short a stock are brokers and market makers, that's it. If you get on a broker that allows shorting of pennies, they DO NOT give you naked shares to short, they HAVE to actually go out and find shares for you to short, real ones. This is why the brokers who allow it have you fill out a "request list" for the penny stock you want to short.
Hope that clears some of the things about shorting of penny stocks...
AI
