Covered Short Selling in Australia: How Retail Brokers Handle Stock Borrowing

How Covered Short Selling Works in Australia

Under Australian law, all short selling must be "covered" — meaning the seller must have a securities lending arrangement in place before executing the sale. This is enforced by Section 1020B of the Corporations Act 2001, which prohibits naked short selling. For retail investors, this means your broker must locate and arrange to borrow the shares on your behalf before your short sale order can be executed.

The Stock Locate Process

Before a short sale can proceed, the shares must be "located" — confirmed as available to borrow. Here is how the process typically works:

1. You place a short sell order: Through your broker's trading platform, you submit an order to sell shares you do not own.
2. Broker checks inventory: Your broker searches their stock lending pool for available shares. This pool includes shares held by institutional clients (super funds, ETF providers, insurance companies) who have opted into securities lending programmes.
3. Locate confirmed or denied: If shares are available, the locate is confirmed and your order can proceed. If not, the order is rejected — you cannot short a stock that cannot be borrowed.
4. Securities lending agreement: The broker arranges the formal borrowing, with collateral posted and lending fees agreed.
5. Short sale executed: Your sell order goes to market flagged as a short sale (per ASIC transaction reporting requirements under Section 1020AB).

Australian Retail Brokers Offering Short Selling

Interactive Brokers

Interactive Brokers offers the widest range of shortable ASX stocks for retail clients. Their global securities lending network provides access to hard-to-borrow stocks that other brokers cannot source. Key features:

• Real-time short availability checker on their platform
• Competitive borrow rates due to large lending network
• 25-50% initial margin on most ASX stocks
• Short selling available in a standard margin account

CommSec

CommSec allows short selling through their margin lending facility. Availability is more limited than Interactive Brokers but covers most large-cap ASX stocks:

• Minimum $5,000 account balance required
• Short selling limited to CommSec's approved shortable stock list
• Higher margin requirements, particularly for volatile stocks
• Phone-based short selling may be required for some stocks

CMC Markets

CMC Markets offers short selling via CFDs (Contracts for Difference) rather than direct stock borrowing. This means you don't actually borrow and sell shares — instead, you take a derivative position that profits if the stock falls. CFDs have different risk characteristics including leverage and overnight funding charges.

Borrowing Fees and Costs

When you short sell, you pay a borrowing fee to the lender of the shares. This fee is quoted as an annual percentage and charged daily based on the market value of your short position.

Typical Fee Ranges on the ASX

• Large-cap, liquid stocks (ASX 20): 0.25-1% p.a. — BHP, CBA, CSL, NAB, and similar blue chips are plentiful in lending pools and cheap to borrow.
• Mid-cap stocks (ASX 100): 1-5% p.a. — Moderate demand and supply. Costs increase if short interest is elevated.
• Small-cap and hard-to-borrow stocks: 5-50%+ p.a. — Limited supply from institutional lenders. Heavily shorted stocks can see borrow fees spike dramatically as available inventory tightens.

Other Costs

• Commission: Standard brokerage applies on both the initial short sale and the eventual buy-to-cover.
• Dividend payments: If the stock pays a dividend while you are short, you must pay the equivalent amount to the lender. This is called a "manufactured dividend".
• Margin interest: If your broker charges interest on margin facilities, this adds to the cost of holding a short position.

Which ASX Stocks Can You Short?

Not every ASX stock is available for short selling. Availability depends on:

• ASX approval: The stock must be on the ASX's approved short sell products list (generally ASX 200 constituents and other liquid securities).
• Broker inventory: Even if ASX-approved, your broker must be able to locate shares to borrow. Smaller brokers have smaller lending pools.
• Current demand: If a stock is already heavily shorted, available inventory may be exhausted and no further borrows can be arranged.

Margin Requirements

Short selling requires a margin account. Your broker holds collateral to protect against the risk that the stock price rises (increasing your liability). Key concepts:

• Initial margin: The collateral required to open a short position, typically 25-100% of the position value depending on the broker and stock.
• Maintenance margin: The ongoing collateral level you must maintain. If your losses cause margin to fall below this level, you receive a margin call.
• Margin call: A demand from your broker to deposit additional funds or close positions. Failure to meet a margin call can result in forced buy-in at unfavourable prices.

Risks Specific to Retail Short Sellers

• Recall risk: The lender can recall their shares at any time, forcing you to buy back the position regardless of your view or current losses.
• Borrow fee changes: Fees can increase without warning if demand for borrows rises or supply tightens.
• Limited availability: Retail clients typically have access to fewer shortable stocks than institutional investors.
• Corporate actions: Mergers, spin-offs, and rights issues can complicate short positions and trigger forced close-outs.

Key Takeaways

• All short selling in Australia must be covered — your broker must locate shares before executing the sale
• Interactive Brokers offers the broadest range of shortable ASX stocks for retail investors
• Borrowing costs range from 0.25% for blue chips to 50%+ for hard-to-borrow stocks
• Margin requirements, recall risk, and dividend obligations are key costs to factor into any short selling strategy
• Track which stocks are heavily shorted on Shorted.com.au to gauge borrow demand and potential availability