Traders flagged volatility as bank's primary reason for the change. Institutional investors can still short through main brokerage

Multiple retail investors say that one of Canada’s largest banks is no longer allowing them to short cannabis stocks directly through its self-directed brokerage.

The Financial Post spoke with four retail investors who said they placed calls to the Bank of Montreal’s InvestorLine brokerage in an attempt to either open a short position on a cannabis company or inquire about how to do so between Friday and Wednesday morning and were turned away by traders.

Each of the four InvestorLine clients, who did not wish to be named, said BMO traders would not open short positions on the particular cannabis stock they were interested in. When they asked if that applied to the sector as a whole, they said they were told shorting would not be possible for any cannabis stock.

One of the four also attempted to open a short position on InvestorLine’s online platform, but said that the order was cancelled minutes later in a phone call from an InvestorLine representative.

“They said from a risk perspective, it’s too volatile,” one retail investor told the Post.

Most of the investors said traders flagged volatility as BMO’s primary reason to disallow shorts on cannabis. Regardless of what kind of account they possessed or how much money they had in their margin accounts to serve as collateral, they were told such a trade wouldn’t be possible. Two of the four said they were also told that BMO did not have enough shares in its inventory to be loaned out.

The restrictions did not appear to extend to institutional investors who short cannabis stocks through BMO’s prime brokerage desk. One institutional investor, who did not want to be named, said shares were available to be borrowed through the desk as recently as Tuesday morning. Investment advisors at the bank also appeared to be able to short cannabis stocks for their clients, according to another institutional source.

The change appears to be a recent one, the four retail investors said. One investor who spoke to the Post was able to open a short position on CannTrust Holdings Inc. through InvestorLine as recently as July.

BMO did not return requests for comment.

Retail investors at other banks do not appear to be having the same issues with shorting cannabis stocks. During a phone call with the Post, cannabis investor John Mastromattei used Toronto Dominion Bank’s brokerage, Waterhouse, to open a short position on Canopy Growth Corp. that was fulfilled in minutes. Representatives for National Bank of Canada and Canadian Imperial Bank of Commerce both said they currently have no restrictions in place on cannabis stocks.

Royal Bank of Canada did not return requests for comment on its policies while Bank of Nova Scotia said a spokesperson was not available to comment.

It's expensive, but there's still shares out there. If you're willing, there's a way to short cannabis stocks Ihor Dusaniwsky, managing director, predictive analysis, S3 Partners

The cannabis sector has long experienced high volatility, but in recent months, upward momentum has been hard to come by as the sector has been bludgeoned on concerns about a lack of profitability. Since reaching its peak in March, the benchmark North American Medical Marijuana Index has cratered, losing 37 per cent.

Short sellers were already focused on the sector prior to the selloff, according to Ihor Dusaniwsky, managing director of predictive analysis at S3 Partners, but that interest has only intensified as cannabis stocks have plunged. As of Wednesday morning, S3 figures indicated the Top 20 names in the cannabis sector had a total of US$3.9 billion in short interest, with US$1.5 billion of that number having been added on year-to-date.

The added interest has resulted in fewer shares being available for short sellers to borrow and in higher fees. Tilray Inc., for example, is currently carrying a 100 per cent borrow fee, Dusaniwsky said, and is close to becoming unavailable.

But others such as Canopy and Aurora Cannabis Inc. shouldn’t be difficult for brokerages to track down despite having borrow fees in the 25 to 40 per cent range, he said.

“It’s expensive, but there’s still shares out there,” Dusaniwsky said. “If you’re willing, there’s a way to short cannabis stocks.”

Institutional investors may have a harder time successfully shorting cannabis stocks at this time, he said, if they’re attempting to open new positions worth hundreds of millions of dollars. However, adding $1 million to $2 million to an existing position should still be possible — perhaps even more so for retail investors who are likely working with less cash.

Dusaniwsky noted that when short interest rises, some brokers attempt to limit their exposure to certain names by boosting fees or prohibiting new short positions. In especially volatile stocks, individual brokers can also be at risk of taking on losses. A sudden rally, he explained, could leave some clients unable to pay what they owe to the brokerage in their margin accounts. The brokerage itself still needs to pay fees to its custodial lenders and if they cannot accumulate the cash from their clients, that money comes out of pocket.

“So even though a stock is borrowable internally, (brokers) will say ‘Stop lending, let’s clean up our books and make sure everything is fine before we start lending again’,” Dusaniwsky said.

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