¶*** All that is Short
Margin vs Cash Accounts
Since shorting and trading on margin are considered banking functions, they are actually governed by rules set by the Federal Reserve Board, not the SEC, although the SEC is the enforcement body. All retail shorting must occur with stock held in margin accounts, not cash accounts. Non-taxed accounts, 401k, IRA, etc., are all cash accounts.
The Mechanics of Shorting
To short a stock you borrow it (say 100 shares) from another client of your broker and sell it to a third party. Several interesting things occur here. First, you have increased (inflated) the "float" (shares held unrestricted to trade) by 100 shares because now you have created two owners of 100 shares where previously there was only one owner.
This is why, if you are short a stock and a dividend (a split is a stock dividend) is declared, you have to pay the dividend to the person who bought the borrowed shares from you. The company will pay their dividend only to the original "holder of record" but the person who bought your shares expects a dividend, too.
A Short Squeeze
A "short squeeze" occurs when the original holder demands his shares back, either by selling them or moving them into a cash (non-marginable) account. This may cause the broker who loaned the shares to "call in the shares" from the shorter if the broker cannot balance the books on all the borrowed stock, i.e., replace them with shares borrowed from another margin account.
A "short squeeze" accelerates the increase in price because it is actually a deflation or shrinking of the float. Shorted shares that are a "hedge" by institutions are hard to "Squeeze" because they are not "naked", i.e., the short could be covered by simply delivering the shares, rather than buying more shares on the open market. Retail shorters are "naked" and on margin, and subject to unlimited market risk.
Calculating Short Numbers
The Exchanges cannot tell if any shares traded are regular or borrowed. They only count the transactions. Therefore every month on the 15th day, all brokers and market makers report to each Exchange how many shares of each stock are borrowed and outstanding short.
Since a stock that is "not marginable" cannot be borrowed, it cannot be shorted by retail customers, but can be shorted by market makers, who also must report short interest to the Exchanges. This is how a non-marginable stock can have an outstanding short interest.
The important thing to remember here is that the short interest figures you see are updated only once a month, on the 15th, because the data is collected only once a month.
Credit for post to Zebra
