If a retail investor goes negative and becomes insolvent - say he shorts a security and then its price shoots up - does his broker have to cover for the negative amount with the counterparty?

Is this why brokerages are wary about letting customers short? (Insolvent customers causing the brokerage financial losses.) The brokerage can't legally say to the counterparty, "The customer is insolvent and has defaulted on his trade, and thus he is banned from trading securities until he can come up with the negative money. But we're 'just the broker' so we're not gonna come up with the rest of the money."

Just trying to understand how that works. Thanks.

Submitted December 10, 2017 at 05:31PM by dasheea http://ift.tt/2B6nDl7