Short-kiting is an investment strategy that makes it possible for naked short sellers to successfully complete a short sale, even if they have not made sure that the shares can either be borrowed beforehand. The actual process of short kiting is accomplished by moving the position from one broker or dealer to another. This allows the naked short seller additional time to successfully borrow the shares needed to complete the process.
Because short-kiting is so closely associated with naked short selling, it is important to understand what is happening when an investor chooses to engage in this type of investment strategy. The naked short selling process involves selling shares of stock short. Unlike short sales where the seller has verified the availability of the shares for the trading activity, a naked short sale involves shares where the trader has not verified that the shares are in fact available. If the investor is not able to acquire the shares within a timely manner, often three market days, the status of the sale is known as a failure to deliver.
In order to deal with a short sale where the investor becomes aware that the needed shares cannot be borrowed, the use of short-kiting helps to buy some additional time. The investor establishes another short sale through a different brokerage and uses the proceeds to cover the initial short sale. In the interim, the investor is able to borrow the needed shares to complete the position created with the short-kiting strategy and the outcome is favorable for all parties concerned.
For many years, short-kiting could only be utilized if the securities used for the short sale were currently enjoying an upward movement in price. This approach effectively eliminated the chance for investors to attempt a kite, making use of stocks that were either stagnant or falling in value per unit. While it is now possible to employ this approach in several markets around the world regardless of the current status of the securities, it is still a better move to engage a short-kiting strategy using securities that are on the uptick rather than showing little or not growth.
Because of the complexity of setting up a short-kiting procedure, it is often a good idea to engage in this type of activity only if the investor knows the marketplace well and has a fair amount of experience with the investment process.