Closed out of position after it became ''unborrowable''

[gekkosluvchild]

Taken from the IG dma trading manual ;

''If you short sell a stock and the underlying share becomes
unborrowable, meaning that we are unable to hedge
against possible losses, your order will be closed at the
market level. A share may either be unborrowable from the
outset or our brokers or agents may recall from us a stock
that we have already borrowed against''

So if you have a short-sell open (CFD or Spreadbet) and the underlying share becomes ''unborrowable'', how common is it for the CFD or SB providers to close you out of your position ?

It seems most of the small caps with IG are usually ''unborrowable'' along with many FTSE 250 shares. Also , say you are long an small cap AIM share and a bear raider targets it forcing stop losses to be hit causing a massive drop in the share price.
Whats the chance of the SB company closing you out of your position even though you had no stop loss ?

Cheers

 

[Trader333]

Shares don't fall in price because of "bear raiding" as you call it, they fall due to a lack of "buying support" and the two are not the same. So you could have a collapse in a share price without anyone short selling it just because no one will buy it and prices keep declining until support is found. You could also have someone trying to short sell up to the maximum number of shares allowed but find price goes up because a lot of people are still buying.

 

[gekkosluvchild]

Trader333,

I'm not sure thats true to be honest.

Surely support and resistance is just alot of investors agreeing that a security is fairly priced until the next catalyst. Those same support levels are where most investors bought in and would rather sell at break even than a loss.

The pro traders have all the orders and know where all the stop losses are placed so they can bet big and trigger those stop losses and when the fear has dried up mop up all the shares. Alot of traders put stop losses at round numbers and the big shorters know where approximately they are and can trigger them if betting big on small illiquid shares.

If the pros know where the stop losses are and can force the markets through support levels why cant the big shorters on the small shares ?

Nobody makes money when the markets are flat.

 

[Trader333]

The pro traders have all the orders and know where all the stop losses are placed so they can bet big and trigger those stop losses and when the fear has dried up mop up all the shares

This does not apply to market orders and that can and does have a big impact. It only applies to limit or stop orders and not everyone uses them. Also what do you mean by "flat" ? There are scalpers who look to take a 1c movement and make a lot of money just trading in those increments.

 

[gekkosluvchild]

So basically given a negative news catalyst , if most stop losses are placed around support levels any big selling forcing the share price through to the stop losses would trigger a wave of more selling demand than buying no ?

 

[Trader333]

Well in my view it is a bit more complex than that. Often when negative news hits a stock the opposite happens to what is expected and those who go short get a hammering because there is buying support often with market orders coming straight in. If it was as simple as you have suggested everyone would make money on news trading and yet they don't.

 

[Trader333]

It depends on what the news is and whether it was anticipated or not.

 

[gekkosluvchild]

This does not apply to market orders and that can and does have a big impact. It only applies to limit or stop orders and not everyone uses them. Also what do you mean by "flat" ? There are scalpers who look to take a 1c movement and make a lot of money just trading in those increments.

Who uses market orders when they can get you in or out at ANY price ?
Most people use limit orders as they get you in or out at a price YOU want.
What is the ratio of ''scalpers'' to investors/longer term traders ? No contest surely and scalpers wont move the markets an inch on 1c movements.

If support and resistance are where most people buy and sell (with limit orders and stop losses) and are areas where most investors agree on price i would say just above and below such areas is where the biggest movements happen, ie - ''breakout''. If the pros have all the orders (including their clients) then surely they know the current sentiment and with abit of a push one way or the other can move the markets until the next level is found?

 

[gekkosluvchild]

It depends on what the news is and whether it was anticipated or not.

OK, so what about a share thats very overvalued on a p/e of 30 that suddenly posts a profit warning. Everyone knows its in for a big fall, but its probably one scenario where a stop loss would make sense for the guys who are big in the money already.