Dear All,

Stock Borrowing Cost for Short Sell Order in Back-Test

I am new comer for metastock. I uses metastock 9.0 version.

For Short Selling, my broker charge 8% P.A. interest rate on daily stock price.

i.e. when borrow 100share of company A at $10 for 10days. I have to pay

borrowing interest to the broker = 100 shares * $10 * 10 days * 8% * 10/365 = $21.9

This is not the same category of Interest Rates incurred by Margin (i.e. System Testing Option of System Tester). Even I deposit full warrenty money 120% of stock value, I still have to pay the stock borrowing fee on the stock to the broker.

Can any fellows suggest how to incorprate this kind of COST in short sell order in the back-test.

Thank you

BH2007

2013-02-15

Dear Eddie,

Thank you for your advice. Yes, I am a beginner.
As I am a begineer, I discovered that taking LONG position only and taking both LONG & SHORT has significant different in all kind of stocks for back-test generally.

That’s why, I cannot ignore SHORT and BUY to RECOVER method.
I know the risk premium is very high for SHORT selling in my country - Hong Kong (stock borrowing rate is 8% plus treasurer bill rate, not to mentioned margin interest too).

However, I dedicate for resolving this metastock software deficiency
(i.e. how to incorporate the stock borrowing COST in the back-test) in order for me to identify whether SHORT selling is financial feasible method in my country.
This is a must exercise!

Certainly, confident level for participating in short selling is a separate issue.

BTW, Local Prime rate (5%) + 3% = 8% is the CHEAPEST stock borrow rate for short selling in Hong Kong market. (after I asked from more than 5 broker firms in HK, perhaps institutional players have another way to deal with this cost, I don't know).

Any ideas about how much COST in different markets (i.e. US, UK or Singapore).

Thank You.

BH2007

2013-02-16

Dear Eddie,

Thank you for your valuable advice and resources.

Yes HK citizen can trade anywhere in the World at PRESENT (I own few BRK-B for fun too) - in the future I don't know! But HK citizen cannot trade in Main Land China offically. Sound ridiculus. But it is also the clever part of Chinese Communist Government too.

BTW - One local broker in HK will pay you 2% anuual interest for lending stock on daily basis. I figure out HK is not a matured market for ODD player (like me) for short selling. It is the club for rich people. Perhaps it is becasue Option dealers sub-press the short selling market in HK. I guess short selling intervene Option dealer's interests too.

As a beginner, I just learn and reading from Investorpedia and continuously pay tuition fee to my honorable teacher - the market[:'(]

BH2007

2013-02-17

Is this calculated daily, on daily CLOSE price? Or, on when the trade is finally closed? How else would you know the length of the trade? Do you trade EOD or intraday?

Dear Wabbit,

Please excuse my ignorance. I am not intending to offence any people. In fact, I would use humble attitude to consult all senior fellows about handling / resolving cost generated from SHORT trading on stock. I would like to summary my view as follows-

1. There is no dispute that borrowing interest must be incurred in SHORTING stocks for international market (perhaps no the case for some US stock).

2. Serious trader must consider all COST(s) from both LONG / SHORT trading.

3. Mr. Wabbbit mentioned that no Metastock clients ever raised this kind of query in the past 27 years DOES NOT equal to “cost on borrowing interest in SHORT trading is not exist”

4. Possible explanation - A for item (3) – the borrowing interest COST for SHORT trading is insignificant (it is unlikely in international market).

5. Possible explanation – B for item (3) – no trader ever encountered this problem in the past 27 years. So I am the first person to see this problem….. Sorry, I am not such a smart person to invent the wheel. People already spotted the issue before.

6. Possible explanation – C for item (3) – there is already some solution for resolving this fundamental problem in Metastock.

To be fair, all business people would very concern all potential and major COSTs in his business plan. He would spend most of his effect on detailing all COST in his plan at very beginning stage; this is the objective of the Metastock’s trading simulation all about!

I am not coming to this forum asking for dispute with people. I am coming here for consulting senior metastock user and designer (if any)…..

I cannot understood the reason behind - people keep telling me borrowing COST is not important in Metastock stimulation and can be ignored by most Metastock users for 27 years!

Trader accepts such simulated result for his shorting plan in stock (without full consideration on transaction costs) is a NEGLIGENCE and not to mention about professionalism! – Please accept my apology on serious wordings.

I accept the reality that Metastock has no such feature to fulfill my shorting plan at present - already purchased the version 11 EOD software, what can I do? But all products could be improved, can’t they?

However, I never see the reason behind – no user ever raised his concern about SHORTING cost? Perhaps he ues calculator and paper to assess his shorting cost? Is there any other more efficient method than a simulator? Wish some patching soon in Version 11 EOD or POSSIBLE ALTERNATIVE in layman level.

I respect your expereince and observation

...........It wouldn't benefit me at all, so by using the term, "community" I guess you're really only referring to yourself? I said it before, I'll say it again :- Add it to the wishlist (for whatever good that will do for future versions) I've been using MS for over a decade and this is the first time I have seen anyone asking for this functionality, so I am guessing it's not a widely required application........

However I also trust my logic.....

Traders care about his money, we cannot fool people by saying that they don't care about borrowing cost in shorting stock (unless you don't participate in shorting stock)

BH2007

2013-02-21

Dear Wabbit,

I see the point now!

Would you provide some quotation (or source of quotation) for custom-make "plug-in" fuction on short trading in stock (i.e. borrowing interest stuff) in Metastock.

I think my requirement and specification is very simple. The total cost on borrowing interet incurred from all short trading transcantion.

I used to write FORTRAN and little visual basic at university, but...... I think it is obsolete and better acquired some services :)

Again, thank you for your kind assistant.

BH2007

2013-02-21

This is the fair and impartial comment I ever heard!

No regret coming to this forum for learning knowledge and trading attitude

BH2007

Dear Eddie,

Thank you for your value advice. I recalled a old book bought in Altantic City 21 year ago (while I was a student spending a wonderful working hoilday in US during summer 1992)

"So You Wanna Be a Gambler - Advanced Routette" by John Patrick, in which the book discussesd how to overcome the house advantage (2.7%) in a routlette table.

1. Bankroll control.

2. Knowledge of the game.

3. Money management.

4. Discipline.

In summary, there is only 3% constant winner against 97% constant loser in any Casino. In a routette table you have to beat the odd of single zero (French version) and double zero (US version). It is about 2.70% and 2.63% of house advantage of a casino respectively.

In the trading market the house advantage is not fixed (dynamic enviroment). It seems more difficult than managing a routette game (static enviroment).

For trading game, I am only at the verrrrrrrrrrrrrrry begining of stage 2 - knowledge of the game as mentioned in John Partick's book. The only advantage I possess - patient. i.e. never rush to place a bet.

I consider trading should be joyful just like any game in a casino (provided that you take control) when people treat trading as a hobby it creates fun by itself. (i.e. spend affordable money on it, built-up knowledge on your own hobby, identify your mistake with reasons, the reward is not just about profit - it is about lesiure, amusement and proofing yourself as a competent person in a particular hobby)

How to proof yourself as a competent person in trading - at least you don't loss money, but not about profit! I managed in routette game through a very tough experience :(

I also run a private lottery pool with a group of friends, so far the performance is better than theory results (still need money input for draws). My broker freind said the result is likely as "a margin of error" at the positive side - luck. The sampling side is too small. Yes, I apprecate his comment. But as a Lottery Manager, it makes fun too! It suggests the draw pattern is not at random walk, there are some skills to overcome the adverse situation for big prizes (i.e. charting lottery tickets given better chance than pure randon tickets). Remember the house advantage in loterry pool is about 35% min. in my country (tax, commission and charity purposes)!

My mindality in trading should similar to what I learned from John Patrick's way in routette table. The sad thing is that I cannot enjoy the game anymore when I return to Hong Kong (casino is not legal here!).

Few months ago, one of my devil friends aroused me that there is always a similar game in NATURE in Hong Kong........

My devil friend gave me a SERIES on managing LONG Buy and LONG Sell position (I doult it works, but could not falsfy it neither), but such SERIES including NO stock screening. So I continue digging deep into it. Then I draft a specification to my own requirment and exchange with my devil friend. He comments that such software specification considered to be instiutional level and must be bloody expensive.

I kept searching the software and talked to another old friend (also a broker) who end-up borrowing me his Metastock version 9. Now I purchased the version 11 after few weeks trial. (it fits my specification, but most improtantly at a reasonable price).

During the trial, I discovered the difference between LONG only and both LONG & SHORT position. That's why I obsessed in SHORTING at present. Once I re-sovle my curisity and limitation of the software, I will continue my jounery.

In the past 7 days in the forum, I learned lots of new stuff from you dear Fellows. That's why I love western culture too. In local forum (HK), no people will give such responsive and constructive comments in a single query.

This is my story for end-up with Metastock!

It is worth to mentioned that I admired Mr. Wabbit's life style. I am a freelance engineer practising in HK too, that why's I have a little-more spare time than average Hong Kong people working on his own hobby.

Working enviroment in HK is crazy as a full time Contractor - 0800 to 1800 Mon to Sat - 7 to 14 days annual holidays a year, not to mentioned overtime til 2000 every day when considering as a responsible person in your position. It is a dog's life for general working class in Hong Kong :(

I recall the film Margin Call - the sacked manager (Risk Management) and the smart analyst used to be a bridge engineer (I also built roads, bridges and tunnels for benefit the mankind too) and rocket engineer respectively. This inspired me that I am also one of the people dealing with numbers! I also learn a good phase from the film too "today my loss is your gain"....Ha Ha Ha

To be serious, I am learning and searching for "on the good life" at present. Certainly, it is not about money (but also essential stuff). It is about how to live with goodness and virtue in my life. In short it is about learning "HOW TO DIE" in philosophical term according to Plato's version.

Talking too much at week end.

BH2007

2013-02-23