Discount Text Books
Do any brokers in U.S. pay interest on short cash balances?
Both Ameritrade, Etrade, and their predecessors are stealing my interest from the cash I get when I short stocks (of which I have a lot in this market). Are there any brokers, discount or otherwise, who pay interest on the cash balance from short positions?
I want to be a “big institution” too. http://www.investorguide.com/igu-article-827-stock-strategies-short-selling.html
[For all you misleaders out there, please don't give me the explanation that I am "borrowing" from my broker and therefore owe them interest; that is simply not true. The only thing I owe them is a transaction fee and a number of shares to be returned at a future date of my choosing. Go read up on your finance text books.]
My understanding is that almost any US broker will pay you inerest on short cash balances IF
(1) You are a big enough player and
(2) You make a big enough fuss about it.
I am not sure how big a player you have to be. I suspect you need a seven-figure account, or close to it.
For many larger stocks you might want to consider buying long-term deep-in-the-money puts instead of shorting the stock. Market makers are usually willing to sell these options for just a few cents over intrinsic value because they will hedge the options by shorting the stock, and they collect interest on both the short sale proceeds and the premium you paid for he put.
The long put position has four significant advantages for the buyer.
(1) It requires less margin.
(2) If the stock price increases significantly you will start losing money less quickly than you would if you sold the stock short.
(3) Your maximum loss is limited.
(4) You cannot get a call from your broket requiring you to cover your short position.
(The fact that you do not have to pay dividends on the long put position is not really an advantage since dividends due prior to expiration will increase the price of the put.)
I will be watching for other replies hoping that someone else knows of a broker who does pay interest on a short account balance for smaller investors, but I am not holding my breath.
It really is amazing how many people who do not understand short selling. Your broker is borrowing the stock from someone else, without paying them interest, and selling it from your account, receiving cash that does receive interest, but yet they do not have to pay you the interest. I doubt if brokers would call it “stealing” as you did, but I think it comes close.
Addendum
I do not think muncie birder’s suggestion “Take the cash position and by t-bills with it, then you will get your interest and it will be free from state and local taxes.” would work.
If you withdraw funds from you short account I am pretty sure your broker will replace them with funds from your money market account (which pays more interest than t-bills) or, if you do not have enough in your moneymarket account, will use a margin loan to replace the funds, and charge you more interest than you will receive from t-bills.
Since I am not certain, you should check with your broker.
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