Do you ever think about starting a brokerage that specializes in having hard to borrow stocks?
Would it have competitive or premium for the privilege commission structures?
What would it be called, Timtrade?
Would the biggest balance sizes have first dibs over the minimum balance to open an account holders when trying to get borrows?
How would the share reservation policy be structured/implemented?
Yes, you got this question because I mentioned this on LiveStock last week, I'll worry about the details if the time ever comes
I'm really surprised that someone hasn't already done this. It comes down to
a supply-and-demand problem, and it should have a solution that reflects this. If there was an intermediary service that would enable it, the cost to borrow each stock could be floating (like the stock price), and if nobody was offering a particular stock to borrow, I could buy some of that stock and name my price to borrow it.
That way, if there was enough demand to short a stock, someone would offer it. Maybe you'd have to pay 10 cents/share upfront and 2 cents/share per day just to borrow it, but it would at least be an option.
You could also have two types of borrows, each with their own price. For one type of borrow, the lender could call back the shares (forcing the borrower to cover). The other type of borrow would not be possible to call back until the borrower decided to cover, but that type of borrow would be more expensive.
This might be too big of a project for Tim to tackle, but I'm shocked that none of the discount brokers have started doing this. There may be some kind of regulations that prevent it.
a supply-and-demand problem, and it should have a solution that reflects this. If there was an intermediary service that would enable it, the cost to borrow each stock could be floating (like the stock price), and if nobody was offering a particular stock to borrow, I could buy some of that stock and name my price to borrow it.
That way, if there was enough demand to short a stock, someone would offer it. Maybe you'd have to pay 10 cents/share upfront and 2 cents/share per day just to borrow it, but it would at least be an option.
You could also have two types of borrows, each with their own price. For one type of borrow, the lender could call back the shares (forcing the borrower to cover). The other type of borrow would not be possible to call back until the borrower decided to cover, but that type of borrow would be more expensive.
This might be too big of a project for Tim to tackle, but I'm shocked that none of the discount brokers have started doing this. There may be some kind of regulations that prevent it.
I saw a tweet from Tim that he likes the above idea. Ok - I've given it some more thought, and I think I know another way this could be accomplished without all the hassle of actually trading stocks at all.
Another way to do this would be to create an exchange for trading cash-settled futures contracts on penny stocks. That way, you completely side-step the issues of the availability of shares to borrow. The futures contract price simply reflects the average opinion of buyers and sellers of the stock's likely worth on the settlement date.
The futures market would still affect the actual share price on stock exchanges, because of arbitrage opportunities. For instance, let's say that Tim decides to bet his entire fortune that AENY is going down 50%, but there are not enough shares available to short, so he starts selling futures contracts on AENY, driving the price down 20%. This presents a huge arbitrage opportunity for anyone who owns AENY stock, as they can sell that stock at its current price, and effectively buy it back as a futures contract at a lower price - a risk-free 20% gain over continuing to hold the AENY stock they have. This initiates a flood of selling of AENY stock and buying of AENY futures contracts, bringing the two prices back into alignment (or close to it - this never works perfectly due to trading frictions). In this way, Tim effectively shorted a stock when there were no shares available to borrow.
This solution also partially solves the issue of taking large positions in an illiquid stock, in that, if there is enough interest in a stock, millions of futures contracts could be traded and held when there are only thousands of stock shares floating around on the market.
The cost to develop and market an exchange like this (or the one I suggested earlier) would be staggering. I think the best bet would be to create the exchange and try to get existing brokerages like ThinkOrSwim to allow their clients to connect to the exchange and trade on it. Otherwise you'd never get enough volume to make it work if you tried to make your own trading platform to use the exchange.
Also, I have no idea if there are enough people who would be interested in trading penny stock futures to make it economical. After all, for most people, the existing stock exchanges provide everything they want. Perhaps people could be attracted by offering larger leverage (like other futures exchanges do), but it seems like it would take a lot more participants to make it work than my first idea would require.
Another way to do this would be to create an exchange for trading cash-settled futures contracts on penny stocks. That way, you completely side-step the issues of the availability of shares to borrow. The futures contract price simply reflects the average opinion of buyers and sellers of the stock's likely worth on the settlement date.
The futures market would still affect the actual share price on stock exchanges, because of arbitrage opportunities. For instance, let's say that Tim decides to bet his entire fortune that AENY is going down 50%, but there are not enough shares available to short, so he starts selling futures contracts on AENY, driving the price down 20%. This presents a huge arbitrage opportunity for anyone who owns AENY stock, as they can sell that stock at its current price, and effectively buy it back as a futures contract at a lower price - a risk-free 20% gain over continuing to hold the AENY stock they have. This initiates a flood of selling of AENY stock and buying of AENY futures contracts, bringing the two prices back into alignment (or close to it - this never works perfectly due to trading frictions). In this way, Tim effectively shorted a stock when there were no shares available to borrow.
This solution also partially solves the issue of taking large positions in an illiquid stock, in that, if there is enough interest in a stock, millions of futures contracts could be traded and held when there are only thousands of stock shares floating around on the market.
The cost to develop and market an exchange like this (or the one I suggested earlier) would be staggering. I think the best bet would be to create the exchange and try to get existing brokerages like ThinkOrSwim to allow their clients to connect to the exchange and trade on it. Otherwise you'd never get enough volume to make it work if you tried to make your own trading platform to use the exchange.
Also, I have no idea if there are enough people who would be interested in trading penny stock futures to make it economical. After all, for most people, the existing stock exchanges provide everything they want. Perhaps people could be attracted by offering larger leverage (like other futures exchanges do), but it seems like it would take a lot more participants to make it work than my first idea would require.
