Short Selling

A short sale runs in the opposite order to an ordinary trade. The seller first borrows stock from a holder willing to lend it — typically a superannuation fund, index manager or custodian — and sells those borrowed shares on market at the prevailing price. The proceeds sit as collateral with the lender. To close the trade the seller buys the same number of shares back on market and returns them, keeping the difference between the sale price and the repurchase price, less the borrow fee and any dividends that had to be passed back to the lender.

Australia only permits covered short selling. Section 1020B of the Corporations Act 2001 prohibits selling a listed security you have no presently exercisable right to vest in the buyer, so a securities lending arrangement — confirmed by the broker as a locate — must be in place before the order is entered. Sellers also flag short sales to their broker, who reports them to the ASX, and separately report net short positions to ASIC once they exceed $100,000 or 0.01% of a company's issued capital, whichever is smaller.

ASIC aggregates those reports across every participant and publishes the result with a four trading day delay. That is the dataset behind every number on this site: a net figure, meaning long holdings in the same security are netted off, and an aggregate one, so no individual fund's position is identifiable. The delay matters when reading the data — a position shown today reflects where the market stood four trading days earlier.

The risk profile is asymmetric. A long position can only fall to zero, but a short position loses money for as long as the share price keeps rising, and the loss has no ceiling. Carrying costs accrue daily through the borrow fee, dividends must be manufactured back to the lender, and the lender can recall the stock at any time and force the position closed at an inconvenient price. That combination is why short sellers pay close attention to liquidity and to how crowded a trade has become.

In the ASIC data, short selling shows up as short interest — the reported short position expressed as a percentage of shares on issue. Comparing that figure against a stock's own history, against its sector, and against its average daily volume is the usual way to judge whether a position is unusual or simply routine hedging activity.