Shorting Facebook: Fifty Shades of Grey

If you thought Facebook was a screaming “sell”, could you have shorted its shares on the day of its IPO?

Facebook IPO
Emmanuel Dunand | AFP | Getty Images
Facebook IPO

That depends on who you ask.

In order to short a stock, an investor would need to borrow a stock from his/her brokerage firm and sell those borrowed shares into the market.

There is a fee, of course, associated with borrowing those shares. The seller is speculating that the stock will go down far enough and fast enough to recoup the cost of borrowing those shares. “Naked” shorting — selling shares that you have not arranged to borrow — is illegal if not, immoral.

In order for a broker to have shares available to lend, the stock must be available in customer accounts.

In the case of an initial public offering, that generally happens on the trade date plus three business days for settlement — commonly referred to as T+3.

Facebook , the social media juggernaut started trading on Friday which makes Wednesday, May 23 the first day that those trades settle — securities are delivered to buyers and payments of money are made to sellers. Brokers should now know exactly how many shares that they have available to lend into the market.

But here’s the grey — market watchers say that it is possible that shares were sold “short” as early as the first day of the IPO.


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