Enlightening piece on short-selling by d.o.g at
www.valuebuddies.com/thread-736-page-22.html
When person A buys from person B, there is an exchange of shares for cash. If you sell shares you do not have, you still have to deliver the shares somehow by the settlement date, typically T+2. If you do not deliver, the exchange will buy from someone else and use those shares to deliver to the buyer. It then imposes a fine on you for creating a failed trade.
If you want to avoid the penalty you need to obtain title to the shares BEFORE you sell them. Typically this means borrowing (taking possession of) the shares from someone who does own them. You have to pay them interest until you return the shares.
How do you borrow the shares? You have to either go through the stockbroker's Share Borrowing & Lending (SBL) program, or use a prime broker.
For SBL, the typical borrowing cost is 10% per year. Usually the SBL stocks come from CDP's lending pool. CDP charges 6%, the brokers add their own fees making it 10%.
Prime brokers like Goldman Sachs may charge as little as 1% per year, but the last time I talked to a prime broker, the starting amount before they will even consider opening an account is US$250k per year in fees. So unless your portfolio is at least US$50m, it's not likely you can get a prime broker.
A more involved question is how you can short S-chips. The short answer is that you can't. The long answer is that it cannot be done because you need to locate a pool of shares to borrow at a reasonable cost.
The CDP lending pool is very limited because it is an opt-in system, and most retail investors don't participate. Even if you do find shares to borrow, the cost is prohibitive at 10% per year. Only a fool or a rank amateur would borrow stock at a cost of 10% per year.
For institutional investors, the prime brokers draw on their own pool, which essentially consists of other institutional investors' holdings. Given the S-chip debacle of the last several years, there are almost no institutional investors today who hold S-chips. Ergo, there is also no pool of stock there to short either.
I hope this enlightens those who were hoping to short S-chips and make tons of money. This was actually possible in 2005-2007 when some S-chips were still popular among institutional investors e.g. Ferrochina, China Milk, Sino Environment, China Hongxing etc. You could borrow these shares and short-sell them, making good money when they collapsed later. But after the collapse all the funds got cold feet and sold out, so the short-sellers couldn't find any more scrip. I doubt if there is much short-selling now in the S-chips.
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