Hard-to-Borrow List

What is a Hard-to-Borrow List?

A hard-to-borrow list refers to a list – i.e., an inventory record – of securities that brokerage firms are reluctant or cannot allow their clients to borrow for the purpose of short selling. Its purpose is to make transparent their list of the stocks that are “hard to borrow,” i.e., difficult to short sell.

What is Short Selling?

In the world of finance and investment, being “short,” going short, or short selling refers to the act of making a profit off of a decline in the value of an investment. It is a speculative investment strategy that involves borrowing a security that is anticipated to lose its value, i.e., experience a decline in its value in the future.

The borrowed securities are then sold in the open market by the investor to buyers that are willing to purchase at the market price. They are then bought back by the investor at a lower price in the future, provided their hedge works and the anticipated decline in the value of the security actually takes place.

Hence, a hard-to-borrow list of a brokerage firm includes all the securities that will be difficult to allow their clients to borrow for the purpose of short selling, largely due to their scarcity.

How Does the Hard-to-Borrow List Work?

Brokerage firms enjoy an abundance of options from which they can make securities available to investors for borrowing for the purpose of short selling. When a brokerage firm comes close to running out of the aforementioned abundance of options of securities available, it notifies its clientele of the unavailability of the securities for short selling and places them on the hard-to-borrow list.

The unavailability of a specific security is disclosed to the clientele of the firm, but the entire hard-to-borrow list is not made available to the clientele. It is because it is an internal list and is not available to the public.

Reasons for the Inability to Short Sell a Security

A security can be unavailable for short selling because of a variety of reasons, including:

• Limited supply of the stock
• Very high volatility
• Bullish market
• Way too many sellers in the market

What is an Easy-to-Borrow List?

An easy-to-borrow list is the direct counterpart of the hard-to-borrow list. It includes all the securities that are extremely liquid and are readily available for short selling.

While brokerage firms don’t usually make their hard-to-borrow lists readily available to their clientele as it is generally an internal list, it is not the case with easy-to-borrow lists. The easy-to-borrow lists are openly accessible by a brokerage firm’s clientele.  Whatever option is not available on the easy to borrow list is assumed to be a hard-to-borrow one.

Regulations Governing Hard-to-Borrow Lists

The regulations for the hard to borrow list fall under the Regulation SHO. The Regulation SHO is a legislation passed by the Securities and Exchange Commission in 2005. It governs trading activities related to short selling.

To specifically prevent a short-selling malpractice known as naked short selling, it contains a clause called the “locate condition” that makes it mandatory for the broker to have good reason to make the security accessible to the investor for short selling. The broker should have good reason to believe that the security can be used in short selling.

Additionally, brokerage firms are required by law to update their hard-to-borrow and easy-to-borrow lists on a daily basis and notify their clientele of any red flags before executing their short sale transactions.

More Resources

CFI is the official provider of the global Capital Markets & Securities Analyst (CMSA)® certification program, designed to help anyone become a world-class financial analyst. To keep advancing your career, the additional resources below will be useful:

• Hedging
• Long and Short Positions
• Naked Shorting
• Speculation
• See all equities resources
• See all fixed income resources