According to most Chinese Zodiac forecast, 2018 will be a terrible year for those born in the Year of the Dragon. Dragon babies ought to be extra careful when it comes to investment in 2018. Heartland Boy was born in the year of the Dragon but he did not shy away from the stock market despite such ominous warnings. Afterall, Heartland Boy never read about famous investors such as Warren Buffet blaming astrology for poor performances. Prescient or otherwise, 2018 had so far turn out to be extremely disappointing in terms of investment returns for Heartland Boy. He is currently staring at paper losses running in the mid-teens in his portfolio. But that is not the worst part. Earlier this year, he committed the cardinal sin of accidentally selling a stock that he did not own or borrow. It caused him to lose money from this short sell stock mistake. Here is the narrative of what happened and a full account of the solutions that he brainstormed.
Short Sell Stocks He Did Not Own
Heartland Boy has multiple trading accounts. He has been diligently using the Standard Chartered Brokerage account for the longest time because it offered one of the lowest commissions in Singapore. However, in 1Q2018, he started to make use of a limited-time promotion consisting of cash rebates offered by DBS Vickers Cash account. Moreover, he was practising the CDP Dividend Hack to consistently fulfil the investment category of the DBS Multiplier Account (not applicable after the latest revision). After a few months, he began to own shares held under the custodian account of SCB as well as his own Central Depositary (‘CDP’) via the DBS Vickers Platform. Nonetheless, the ever-organized Heartland Boy had them neatly written down in his very dependable portfolio tracker. Or so he thought.
One fine day, a moment of utter recklessness befell Heartland Boy. Hoping to take advantage of a surge in price of a stock, he placed a SELL order on a stock via the DBS Vickers platform. The order proceeded to clear and Heartland Boy cheered his good fortune. It all came crashing down when he received this email the next working day.
TLDR, Heartland Boy sold a stock from his CDP via the DBS Vickers Platform. However, the shares of this stock had instead been residing under the custodian watch of Standard Chartered all this while! Therefore, under the eyes of SGX, Heartland Boy had committed a naked sell by selling shares that he did not own. The definition of naked shorting is the illegal practice of short selling shares that have not been affirmatively determined to exist. (Source: Investopedia)
Solution 1: Transfer Shares From Custodian Account to CDP
Heartland Boy’s first reaction was to contact SCB Equities team and request for his shares to be transferred to his CDP. Afterall, he did own the shares. It just happened so that they were held in custody by a brokerage and hence the system does not recognise him as the beneficial owner. The SCB customer service officer said that this will take 10-14 working days and a transfer fee would apply. When Heartland Boy heard this, he thought he was still living in the stone age. How could it possibly take up to 3 freaking weeks for such a simple transfer to take place? It is essentially just a transfer of electronic documents right. This solution was obviously not viable as Heartland Boy needed to show CDP ownership of the stock in 3 days’ time.
Solution 2: SGX Buy-In
The regulations governing a naked sell is that if Heartland Boy still fails to deliver the shares on settlement date (T+2 closing), SGX will be forced to purchase the shares at 2 bids higher than the closing price of the stock on T+3. Basically, SGX is forced to act to ensure that Heartland Boy’s short sell position is covered. With fees and penalties added in, Heartland Boy incurred a $344 financial loss. This was a painful financial lesson for Heartland Boy in his investment journey. Here is the breakdown of the fees charged:
Had SGX not been able to buy in successfully, Heartland Boy would have been slapped with a minimum fine of $1,000!
Come to think of it, it would have been entirely possible for Heartland Boy to “profit” from this accidental short selling. If SGX bought in at a price lower than Heartland Boy’s selling price, Heartland Boy would have made a smaller loss than $344 or even a trading gain after all the fees. Unfortunately, Heartland Boy could only watch helplessly as the share price refuse to dip any further during those 3 days. Well, that should hardly come as a surprise because the Year of the Dog is supposed to be an unlucky year for Dragon babies.
Solution 3: Instruct Your Broker To Borrow Shares
Solution 3 only came about after the whole episode had died down and more significantly; after Heartland Boy had taken a dent to his pocket. Determined not to repeat this mistake again, he searched online for better solutions to his problem. One of the most common recommendations was the following:
- Contact your broker and request to borrow the shares by T+2 day
- Request broker to waive the $75 trading commission (unsure if this is possible)
If the broker successfully managed to find shares to borrow by T+2, you must be prepared to make payment by cash cheque at the counter. Note that Heartland Boy has not personally experienced this method and therefore cannot vouch for its efficacy. He would be happy to hear from his readers about their own experiences.
Short Selling Stock Mistake
Hope this anecdotal story would be of help to future investors who find themselves in such awkward situations. Of course, if Heartland Boy really wants to short sell again, he would be using an instrument such as Contract For Difference (‘CFD’). And that is an entirely legitimate and proven short selling strategy employed by some of the biggest hedge funds.