Short Selling Proceeds and Stop Buy Orders

When a short seller elects to a sell a stock short, ALL the proceeds from the short sale of the stock are despoited into the short sellers account PLUS the initial margin requirement amount determined by the broker. Howerver, Schweser Notes makes this very unclear by saying “(3) must keep a portion of the proceeds of the short sale on deposit with the broker.” To me this reads as though the short seller can withdraw/use some of the proceeds of the short sale right away. What I believe they are referring to is the initial margin requirement but I’m not sure. Can someone please clarify/explain what is correct?

In addition to the above, my understanding is all the proceeds from the short sale are deposited in the short sellers account can NOT be used to purchase other securities while the short sale is still active. My question is in regards to a STOP BUY ORDER in which the short seller can put into place as a means to protect themselves from additional/future losses if and when a stock they sold short continues to rise to a certain price point specified in the STOP BUY ORDER. My question is can the funds within the short sellers account (would more than likely be more than the initial sale proceeds and initial margin amount as the stock would have risen and a larger deposit would have been made to satisfy the maintaince requirements) be used to fund the STOP BUY ORDER “or” must the short seller fund this amount with additional outside capital?

Thank you in advance for your time and insight!!!

Suppose that the the short sale nets $100,000, and that the margin requirement is 40%. Then the short seller can withdraw $60,000 and do with it whatever he likes.

If the maintenance margin is 30%, then if the margin account drops below $30,000, he’d have to deposit some more collateral. Apart from that, he’s free to use the rest of the money.

Thank you for the response. So can you explain the following question and answer? One of the study questions in the Kaplan Q Bank:

Which of the following statements about selling a stock short is least likely accurate?

A) The seller must return the securities at the request of the lender. B) The short seller may withdraw the proceeds of the short sale.

C)

The seller must inform their broker that the order is a short sale before completing the transaction.

The Answer is B

Reasoning : Proceeds from the short sale must remain in the brokerage account along with the required margin deposit.

Having researched this, I find that you’re correct: the proceeds of the short sale must remain on deposit in the brokerage account (of the broker from whom the shares were borrowed), and additional margin has to be deposited as well. The lender of the shares may invest the proceeds of the short sale in securities (e.g., Treasuries) to earn interest.

I had read what you did in the Schweser Notes and interpreted it the way you did. We were both wrong. But now we both know better.

The explanation of the question is correct, according to my research.

I’d encourage you to write Schweser and point out that bit in the Schweser Notes. I’ll do the same.

(Note: this does seem at odds with, for example, a long-short hedge fund strategy. A 130/30 assumes that the 30% proceeds from short sales can be used to increase the long position by 30%. I need to do some more research on this.)

I have been into trading for last 5 years and as per my experience I can tell you that in case of short sale, broker keeps the short sale proceeds plus the margin. Now margin part depends on the asset shorted and the market we are dealing in. I always advise for Schweser but it too have its shortcomings. Another example is Schweser says the tick size for Eurodollar is 25$ but in reality it is 12.5$.

I just learned that people often negotiate who gets the interest when the proceeds are invested in interest-bearing securities; commonly it’s split between the lender of the securities and the borrower.

Oh, a small nit: it’s _ **25** _, not _25_ (and _ **12.50** _, not _12.5_).

Yes it’s a split usually and Thanks for the correction…

Do you work with short sales? I never have; as I say, I just learned that it’s generally negotiated.

Do you work with short sales? I never have; as I say, I just learned that it’s generally negotiated.

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I am into gamma and vega arbitrage, desk adjacent to me does short sales… But I do deal with these things while shorting options but I dont bother much as these are pennies of my portfolio.