Dwayne. The question is do they allow shorting ? Your answer is yes but it's damn expensive. So, they DO allow shorting then. Anyhoo, the guys that short are usually pros. Those moo fies have more $$$$$ than Gawd. Margin don't mean shit to them.
Well of course MM's short...they buy and sell all day, but the settlement day is 2 days later (used to be 3). If they didn't short, you couldn't buy stock instantaneously. All that stock that is sold/bought doesn't settle for 2 days, and that is shorts.
Shorting penny stocks is generally something that "retail" either lacks the know-how (most brokers don't allow it), or the margin requirements to do. Brokers that allow the shorting of penny stocks require 2.5 million in excess capital to short 1 million shares, and consequently the financial barriers tend to be much too high to permit for considerable retail shorting selling.
Besides MM's that can short and do short daily to make a market, there exists another alternative called "short selling against the box".
This practice can be done by a noteholder that shorts the proxy shares that they possess. This used to be more commonplace prior to 1997, as back then it was used for deferring a taxable event.
Despite the change in tax law, shorting against the box continues today.
For example, a noteholder that holds a convertible note that hasn't yet matured would be inclined to "short against the box" when the SP has gone on to run without them and is expected to retrace. So with this outcome, the noteholder will short against the box to ensure they catch "the gains" on the backside.
Point is, shorting selling penny stocks is very real and it is done with sophistication.
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