Short selling plays a vital role in financial markets, but it is often viewed negatively because it involves profiting from the losses of others, which can be seen as unethical. This notion may come from a lack of understanding and an emotional reaction to a decline in asset values. Short selling remains one of the most misunderstood aspects of financial markets today.
Find out what short selling is, why it is essential for functional markets, and how you can benefit from it, even if you have never engaged in short selling before.
Every broker can offer short selling to their clients, but not everyone has the appropriate infrastructure to enable traders to do so efficiently. Therefore, traders must carefully evaluate the available trading conditions of the broker, know what to look for, and ensure their short-selling brokers offer the necessary functionality.
Short trading brokers often facilitate short sales by ‘lending shares’ to traders commonly using instruments like CFDs (contract for difference) to allow regulatory-compliant short selling. Brokers charge a fee for the service and daily financing for the duration of the trade.
In the retail Forex / CFD industry, every trading platform is also a short selling platform, because there isn’t any real difference in going long or short on a CFD, which is effectively a derivate bet on price movements whether up or down.
- FXTM, Best all-around broker with high floating leverage and fast execution.
- Exness, Tight spreads + leverage up to 1:2000.
- AvaTrade, Highly regulated, choice of fixed or floating spreads.
- Eightcap, Competitive pricing + excellent daily videos.
Best Short Trading Brokers Comparison
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Regulators | CMA, CySEC, FCA, FSC Mauritius, FSCA | CBSC, CMA, CySEC, FCA, FSA, FSC Belize, FSC Mauritius, FSCA | ASIC, BVI, Central Bank of Ireland, FFAJ, FSCA, KNF, MiFID | ASIC, CySEC, FCA, SCB |
Year Established | 2011 | 2008 | 2006 | 2009 |
Execution Type(s) | ECN/STP, Market Maker | Market Maker | Market Maker | ECN/STP, Market Maker |
Minimum Deposit | ||||
Average Trading Cost EUR/USD | 0.1 pips | 0.6 pips | 0.9 pips | 1.0 pips |
Average Trading Cost GBP/USD | 0.2 pips | 0.7 pips | 1.5 pips | 1.2 pips |
Average Trading Cost Gold | $0.18 | 12.5 pips | $0.29 | $0.12 |
Trading Platform(s) | MetaTrader 4, MetaTrader 5, Proprietary platform | MetaTrader 4, MetaTrader 5, Proprietary platform | Other, MetaTrader 4, MetaTrader 5, Web-based+ | MetaTrader 4, MetaTrader 5, Trading View |
Islamic Account | ||||
Negative Balance Protection | ||||
| Visit Website | Visit Website | Visit Website | Visit Website |
FXTM
In Summary Best all-around broker with high floating leverage and fast executionFXTM ranks among the best short-selling brokers due to its deep liquidity, ultra-low trading fees, and full support for algorithmic trading. With 99.90% of all orders executed with an average of 0.071 seconds and 97.18% receiving an average price improvement of 0.30 pips or $3.00 per lot, FXTM maintains an excellent trading infrastructure.
Forex traders also benefit from ultra-low trading fees in the Advantage account, which features raw spreads from 0.0 pips for a commission between $0.80 to $4.00 per 1.0 standard lot. MT4 and MT5 fully support algorithmic trading, and VPS hosting ensures low latency 24/5 market access.
Pros & Cons
- Excellent commission-based Forex pricing environment and transparency
- Upgraded MT4/MT5 trading platforms plus proprietary mobile trading app
- Quality market research and educational content for beginner traders
- A highly regulated broker with a tier-1 license
- No cryptocurrencies and limited choice of commodities
Exness
In Summary Tight spreads + leverage up to 1:2000Exness offers MT4/MT5, which include algorithmic trading functions. Free VPS hosting exists for demanding traders requiring low latency 24/5 market access. The requirements rank among the easiest to achieve and maintain versus other brokers. Traders must have a minimum deposit of $500, a free margin of $100, and have trading activity over the past 14 days.
Trading fees for Forex traders are highly competitive, with commission-free minimum spreads starting from 0.1 pips or $1.00 per 1.0 standard round lot due to deep liquidity. Exness also excels with its pricing transparency, placing it among the best short-selling brokers.
Pros & Cons
- Instant withdrawals, based on the payment system, from a trusted broker with numerous payment methods
- High level of transparency and financial audits by a Big Four accountancy firm, Deloitte
- Multi-regulated broker
- 24/7 multi-lingual customer service
- No education for beginners
AvaTrade
In Summary Highly regulated, choice of fixed or floating spreadsShort sellers who prefer a commission-free cost structure will find that AvaTrade ranks among the best short-selling brokers. Trading fees start from 0.9 pips or $9.00 per lot, which is higher than commission-based alternatives, but within a reasonable range. While AvaTrade shines with its choice of trading platforms, MT4 and MT5 cater the best to short sellers, as both support algorithmic trading. A complete guide to VPS and algorithmic trading is also available.
AvaTrade offers a competitive edge over many short-selling brokers due to the availability of the third-party tool Capitalise AI, which allows algorithmic trading in a code-free environment.
Pros & Cons
- High-quality educational offering via SharpTrader
- Excellent choice of trading platforms catering to various trading needs
- Broad asset selection and cross-asset diversification opportunities
- Well-regulated and trusted broker with oversight from a central bank
- Trading costs competitive but nothing special
Eightcap
In Summary Competitive pricing + excellent daily videosPremium liquidity and excellent order execution, due to the collocation of trading servers with leading global financial firms, make Eightcap one of the best short-selling brokers. The MT4/MT5 platforms fully support algorithmic trading, and free VPS hosting for low-latency 24/5 market access only requires a monthly trading volume of 5.0 lots.
Eightcap trading fees in the commission-based account are highly competitive, with average spreads on the EUR/USD of 0.06 pips or $0.60 per lot for a commission of $7.00. Adding to the competitive advantage is the third-party tool Capitalise AI. It enables algorithmic trading without the need to code.
Pros & Cons
- Low minimum deposit and high leverage of up to 1:500
- Competitive cost structure
- Excellent technology infrastructure and seasoned management team
- Daily research and quality educational content
- Limited leverage in some areas
What is Short Selling?
Short selling refers to traders borrowing shares, usually from brokers lending them at the current market price, in the hope of buying them back at a lower price before returning them to the broker. For example, a trader borrows 1,000 shares in Company ABC at $75 per share, the trader then agrees to sell the shares at this price. The price of the shares then falls to $60, and the trader buys them back at this price, returning the 1,000 borrowed shares to the lender. The gross profit is $15 per share and $15,000 on the deal.
Contrary to widely held belief, the lender has not lost money, as the share price drop is irrelevant to a counterparty initiating a short sale. Brokers often pay long-term investors for borrowing their shares. It does not apply to derivative contracts, where brokers offset positions from their internal order book, which suffices to meet demand. Only about 10% of daily trading volume consists of short selling, but it adds necessary liquidity to markets to enable more trades to be conducted at reduced cost to all participants.
What Is Naked Short Selling?
Traders entering short positions without borrowing the shares initiate a naked short sale. It is often an illegal transaction, as it creates artificial demand. Each publicly listed company has a set number of shares in circulation, which it can amend, but the total amount cannot exceed the registered shares. Since short sellers borrow shares, the transaction is legal and approved by regulators.
Naked short selling would artificially add shares, as the trader never borrows the shares. It was more common before the turn of the millennium and before technology replaced manual record keeping. OTC shares were often the victim of naked short selling, usually in pump-and-dump or boiler room schemes, both illegal practices.
What Is Short Selling in the Stock Market?
Short selling in the stock market is where traders borrow shares from their short-selling brokers if they believe a price movement to the downside is imminent. Institutional traders and hedge funds also use short selling to hedge risk, protect long-term investments, and generate short-term income.
Short Selling and its Importance in Day Trading
Short selling is paramount to day trading and benefits everyone, including those opposed to the practice, due to an uninformed opinion.
The primary reasons short selling is essential in day trading are:
- Short-selling brokers add liquidity to markets.
- Short sellers, or bears, ensure appropriate market pricing of assets.
- Short selling lowers the potential for bubbles and market crashes.
- The added liquidity of short selling decreases spreads, which compress trading fees for all traders.
- Short selling increases the trading opportunities for other day traders, notably for scalpers. the ability to short is essential.
- Traders can hedge their portfolio exposure from short term risk and adjust their overall risk profile via short selling.
- Short selling assists capital formation and increases market efficiency.
- Short selling Forex as a day trading strategy does not incur swap rates if you close the position before 5pm EST.
What to Look for in the Best Brokers for Short Selling
Short-selling requires a few core components that all competitive short-selling brokers should offer:
- Low trading fees, ideally with a volume-based rebate program
- Competitive overnight financing rates
- Liquid trading instruments
- An innovative trading platform with clear order placing technology and support for algorithmic trading solutions.
- Phone-assisted trading is a bonus.
Bottom Line
Short-selling brokers only account for approximately 10% of daily trading volume, but they benefit the entire financial ecosystem, despite their unjustified negative reputation. Short-selling brokers add liquidity and decrease trading fees for all market participants. They also ensure an efficient and well-functioning market.
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