Where Does The Broker Get The Stock?
The short answer is from other customers. Oddly enough, he doesn’t have to ask permission!
Short selling is a marginable (???) transaction. In plain English, that means you must open a margin account to sell short. This is the same account you would use if you want to use your stocks as collateral to borrow money from your broker.
When you open a margin account, you must sign a hypothecation / rehypothecation agreement. This hypothecation agreement says you will pledge your stocks as collateral against your loan. The re-hypothecation agreement allows your broker to loan your stocks to a bank, or to other customers!
