Hard-To-Borrow List

A hard-to-borrow list is an inventory record used by brokerages to indicate what securities are difficult to borrow for short sale transactions. A brokerage firm's hard-to-borrow list provides an up-to-date catalog of securities that cannot easily be borrowed.

A security may be on the hard-to-borrow list because it is in short supply or because of its high volatility. To enter a short sale, a brokerage client must first borrow the shares from his or her broker. To provide the shares, the broker can use its own inventory or borrow from the margin account of another client or another brokerage firm.

Investors who enter short sale transactions attempt to capture profits in a declining market. For example, an investor may think that shares in Apple are likely to drop in price. The investor can short sell the stock and, if the price falls as he or she anticipates, repurchase it back for a profit. If the stock rises, however, the investor loses money. (For more, see: The Basics of Short Selling.)

Brokerage firms update their hard-to-borrow lists daily. A broker must be able to provide or locate the shares to loan to their client before executing the client's short sale transaction. Regulation SHO, which was implemented Jan. 3, 2005, has a "locate" condition that requires brokers to have a reasonable belief that the equity to be shorted can be borrowed and delivered to the short seller. The regulation is intended to prevent naked short selling, a practice where the investor places a short sale without holding the shares. (To learn more, see: The Truth About Naked Short Selling.)

The hard-to-borrow list is the opposite of the easy-to-borrow list, which is an inventory record of securities that are available for short sale transactions. In general, an investor can assume that securities not included on the hard-to-borrow list will be available for short selling. While a brokerage firm's hard-to-borrow list is typically an internal list (and one that is not available to clients), the firm's clients usually have access to the easy-to-borrow list.

Brokerage clients may have to pay hard-to-borrow fees on certain short sales. Typically, the cost of borrowing stocks on the difficult-to-borrow list is higher than for stocks that are on the easy-to-borrow list. Large brokerage firms usually have a securities lending desk that helps source stocks that are difficult to borrow. A brokerage's securities lending desk also lends securities to other firms.