I'm building a low frequency US equity stat arb system. On any given day the system is long ~100 stocks and short ~100 stocks. It trades once a day at the open, and on average 4/5 of the portfolio gets replaced each day.

I am using the formula on page 21 of http://www.courant.nyu.edu/~almgren/papers/costestim.pdf as my slippage cost model.

As a liquidity filter, I'm only trading stocks with minimum price of 5 dollars and minimum daily dollar volume of 30 million dollars.

Is it safe to assume that these fairly liquid stocks are all possible to borrow for shorting? If not, when you backtest a system, is there a way to estimate if a stock could have been shorted, or is there a place to buy that information?

  • $\begingroup$ Liquid leveraged ETFs (SDS, FAZ etc) will pass your filter and still may be hard to borrow on certain days. I'd remove those, and, probably, VXX - related family of ETFs. $\endgroup$ – LazyCat Mar 24 '15 at 1:05
  • $\begingroup$ Thanks LazyCat, I should have mentioned that I've excluded etfs (only using CRSP share codes 10,11,12). $\endgroup$ – siegel Mar 24 '15 at 13:44

The list will differ depending on your brokerage relationship. Not every broker's hard-to-borrow list will be the same. And you may be able to use 3rd party relationships purely for locates (finding hard-to-borrows).

Your liquidity requirements look reasonable. I'm just going to pull a number out of the air (although I see it, this isn't something I track) and say that more than 90% of this universe will not be hard-to-borrow. You might also add recent IPOs, because they're usually unavailable or expensive to get locates for a while regardless of volume.

If you have the right relationships then there will be quite a few hard-to-borrow cases, but for a price you can still get most shares.

I don't know where you would get historical data on this to test, because I think you would just cache it off some status feed from your brokers.

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  • $\begingroup$ Do you mean "if you do not have the right relationships" in the third paragraph? $\endgroup$ – siegel Mar 20 '15 at 0:27
  • $\begingroup$ To piggy back on, in general I'd look at cap also. Small cap in general will more liquidity issues than large cap (maybe instead of your $5 minimum). $\endgroup$ – Luke Mar 20 '15 at 12:44
  • $\begingroup$ @siegel to clarify, the meaning is that you can get shares of most hard-to-borrows in your network, if you have a vendor relationship with a party who has shares $\endgroup$ – Nathan S. Mar 20 '15 at 14:58
  • $\begingroup$ @Luke makes a good point, because average volume can be deceptive since it will spike on most recent interest and market cap may be another useful liquidity metric $\endgroup$ – Nathan S. Mar 20 '15 at 15:00
  • $\begingroup$ Thanks for the suggestion on market cap. Found a data source for securities lending data: markit.com/product/pricing-data-securities-finance $\endgroup$ – siegel Mar 26 '15 at 20:31

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