Shorting Prefs

What’s going on?

The other day I received an eMail from an Assiduous Reader who wrote in and said:

I follow your blog with great interest. I am a U.S. citizen who actively trades preferred securities, mainly of U.S. banks. I am interested in trading Canadian preferred stocks, but I am not sure of the implications of trading cross-country. Do you know of any resources (articles, online resources, etc) that could inform me of the issues of trading Canadian preferreds as a U.S. citizen?

… and now the thread on the BoC Review, of all things, has gone wild with discussion:

Assiduous Reader GAndreone:

Since I am familiar with the FX market I found the article very interesting. As a FX client if you trade above certain levels, order book and some limited flow information is available from your dealer.

I believe some of the same flow information is being used in the Pref market to set pricing even though volume information is available.
Short interest in pref shares appears to be the only information that is not readily available!

… to which I replied

I believe some of the same flow information is being used in the Pref market to set pricing even though volume information is available.

Definitely. This will often happen when a trader is working an order … if a client wants to sell 100,000 shares ‘sometime this week’ and there are no takers you’ll often see the market get taken down in stages until the dealer can find a buyer.

Short interest in pref shares appears to be the only information that is not readily available!

Shorting prefs is expensive since the dividend effects are large. Shorts exist, to be sure, but to nowhere near the same extent as in the equity and bond markets.

… and Assiduous Reader cowboylutrell:

Since we’re on the subject of shorting preferred shares, I’d like to know if other brokers are as restrictive as mine on that matter. Since about the beginning of October 2008, it’s been impossible for me to short any preferred share at all. This unavailability of prefs for shorting doesn’t apply only to my own account, but to all customers’ accounts at my broker.

For instance, of the roughly 4,700 stocks listed on the TSX, only 61 were shortable today at my broker’s. None of them are preferreds (they were all common stocks).

As I mentioned above, I’d be curious to find out if shorting preferred shares is still feasable at other brokers in Canada these days.

Many thanks.

… and back to A.R. GAndreone:

Cowboylutrell Says:
As I mentioned above, I’d be curious to find out if shorting preferred shares is still feasable at other brokers in Canada these days.

RBC Direct indicated they would be willing to short prefs if they held shares to short.

jiHymas Says:
Shorting prefs is expensive since the dividend effects are large.

Should the dividend charge only be applicable if you run passed the next ex-date?

And I’ll answer that one here: Yes, the expense (due to tax effects) directly applies only if you’re short over the ex-Date. However, there could be indirect effects if you were to be a forced (or strongly encouraged) buyer in the period immediately preceeding the ex-Date.

Also, I will note that I have been trying to find sponsors for a market-neutral preferred share hedge fund for years. Tax effects won’t apply if the beneficiaries are non-taxable … pension funds, for instance. All inquiries welcomed!

One Response to “Shorting Prefs”

  1. […] have recently received an eMail from an Assiduous Reader who, having read the post Shorting Prefs, writes in and says: I read the “Shorting Prefs” discussion dated February 19th, 2009 […]

Leave a Reply

You must be logged in to post a comment.