13 ms·

And probably also a lot on short fees on the securities they lend out. Cheap brokers lend out the securities you own to short sellers, short sellers have to pay

And probably also a lot on short fees on the securities they lend out. Cheap brokers lend out the securities you own to short sellers, short sellers have to pay interest for such privilege (there's essentially an OTC market for the % rate). Note that this is not much different from earning interest on lending out cash. Respectable brokers pass at least some of the short fees to the investor. Interactive Brokers, which I use, pays back around 50%.

gibybo 7y ago
This only applies if you have a margin account, right?
- bdonlan 7y ago
  Your shares can only be lent if you have a margin account and have a negative cash balance (or collateral placed with other parties in excess of your cash balance), or if you have opted into a securities lending program like the one at IB.
  - scurvy 7y ago
    I've seen this oft repeated bit about only margin account holdings can be lent out to shorts. Do you happen to know the regulation or law that says this is the case? Or is this another instance of drinking 8 glasses of water a day?
- Scoundreller 7y ago
  No, this is about lending stock you own to short sellers because they’re not supposed to short naked.
  - koolba 7y ago
    No you can only lend out the securities of clients that are themselves on margin or have an explicit borrow agreement (which grants you a kickback of the money made from the stock loan). Cash accounts without a margin balance cannot be lent out.
    - Scoundreller 7y ago
      Ok, but where do my holdings in a mutual fund or ETF fit?
      - koolba 7y ago
        ETFs are treated like stocks. That's kind of the point. They can be lent out by your broker if you're on margin. Mutual funds are opaque. It's up to the fund to decide if they want to make some extra money lending their securities out to speculators. As they're holding the stocks long term and standard securities lending is over collateralized, the risk profile is relatively low compared to the extra return.
- H8crilA 7y ago
  No, they often lend out from cash accounts.
PhantomGremlin 7y ago
And probably also a lot on short fees on the securities they lend out. That depends on the actual security. Currently at Schwab it is free to short a very liquid stock or ETF, because Schwab has access to a very large supply. Which means Schwab only passes along a very de minimis amount to the lender. I assume they eat this amount out of their commission. They do of course charge appropriate fees for hard-to-borrow stocks. Every stock has a different fee. This will probably change once Schwab stops charging commissions. Their fine print on that announcement says "Stock Borrow fees still apply". So those fees will apply to more/all stocks going forward?
- zaroth 7y ago
  My understanding is that if you’re long a stock that the brokerage needs permission from you to loan the shares you have to other short sellers. For example this program at Schwab [1] where they actually pay you a small interest rate to borrow your shares. Can they lend out your shares without permission? [1] - https://client.schwab.com/secure/file/P-5182696/MKT33373-05.pdf https://client.schwab.com/secure/file/P-5182696/MKT33373-05....
southerndrift 7y ago
Does this mean that using those brokers means that I 'nakedly' own those shares? I.e. if I actually pick a successful share and the price explodes, the shorter or the broker cannot buy it back and I end up owning nothing? With all the people shorting Tesla, who will own Tesla if Tesla succeeds and the price explodes?
- manigandham 7y ago
  No, if you short shares and the price rises too much, your account will go into a margin call and your broker will liquidate all of your positions. All brokers have complex risk management to protect their interests. In the extremely rare case that you end up with a negative balance, the broker will cover the shares and collect the money from you like any other debt.
  - southerndrift 7y ago
    But the broker doesn't necessarily lend out the shares to his own clients. And even if he does, how does he get back the shares from the person who went long? The broker will have to buy other shares. But if the price of those shares is exploding, who is willing to sell them?
    - manigandham 7y ago
      I'm not sure what you're asking. You only borrow shares if you're shorting. You just buy them if you want to go long. The broker will handle finding shares to lend to you if you want to short. Liquidity is a separate problem, which is why you might have low spreads or not even be able to find shares to short in the first place. Your ability to short a stock is not guaranteed and up to the market conditions and broker risk. And like I described, if you borrow shares to short and the prices increases greatly, then the broker will margin call your account to buy them back forcefully.
      - southerndrift 7y ago
        I am not asking what happens if I short shares but if I lend to others my shares. If the broker cannot buy those shares back, I face the risk of losing them, don't I? So I am wondering: does using those brokers come with the risk that I end up owning nothing if I pick a very successful stock?

gibybo 7y ago

This only applies if you have a margin account, right?

bdonlan 7y ago
Your shares can only be lent if you have a margin account and have a negative cash balance (or collateral placed with other parties in excess of your cash balance), or if you have opted into a securities lending program like the one at IB.
- scurvy 7y ago
  I've seen this oft repeated bit about only margin account holdings can be lent out to shorts. Do you happen to know the regulation or law that says this is the case? Or is this another instance of drinking 8 glasses of water a day?
Scoundreller 7y ago
No, this is about lending stock you own to short sellers because they’re not supposed to short naked.
- koolba 7y ago
  No you can only lend out the securities of clients that are themselves on margin or have an explicit borrow agreement (which grants you a kickback of the money made from the stock loan). Cash accounts without a margin balance cannot be lent out.
  - Scoundreller 7y ago
    Ok, but where do my holdings in a mutual fund or ETF fit?
    - koolba 7y ago
      ETFs are treated like stocks. That's kind of the point. They can be lent out by your broker if you're on margin. Mutual funds are opaque. It's up to the fund to decide if they want to make some extra money lending their securities out to speculators. As they're holding the stocks long term and standard securities lending is over collateralized, the risk profile is relatively low compared to the extra return.
H8crilA 7y ago
No, they often lend out from cash accounts.

PhantomGremlin 7y ago

And probably also a lot on short fees on the securities they lend out. That depends on the actual security. Currently at Schwab it is free to short a very liquid stock or ETF, because Schwab has access to a very large supply. Which means Schwab only passes along a very de minimis amount to the lender. I assume they eat this amount out of their commission. They do of course charge appropriate fees for hard-to-borrow stocks. Every stock has a different fee. This will probably change once Schwab stops charging commissions. Their fine print on that announcement says "Stock Borrow fees still apply". So those fees will apply to more/all stocks going forward?

zaroth 7y ago
My understanding is that if you’re long a stock that the brokerage needs permission from you to loan the shares you have to other short sellers. For example this program at Schwab [1] where they actually pay you a small interest rate to borrow your shares. Can they lend out your shares without permission? [1] - https://client.schwab.com/secure/file/P-5182696/MKT33373-05.pdf https://client.schwab.com/secure/file/P-5182696/MKT33373-05....

southerndrift 7y ago

Does this mean that using those brokers means that I 'nakedly' own those shares? I.e. if I actually pick a successful share and the price explodes, the shorter or the broker cannot buy it back and I end up owning nothing? With all the people shorting Tesla, who will own Tesla if Tesla succeeds and the price explodes?

manigandham 7y ago
No, if you short shares and the price rises too much, your account will go into a margin call and your broker will liquidate all of your positions. All brokers have complex risk management to protect their interests. In the extremely rare case that you end up with a negative balance, the broker will cover the shares and collect the money from you like any other debt.
- southerndrift 7y ago
  But the broker doesn't necessarily lend out the shares to his own clients. And even if he does, how does he get back the shares from the person who went long? The broker will have to buy other shares. But if the price of those shares is exploding, who is willing to sell them?
  - manigandham 7y ago
    I'm not sure what you're asking. You only borrow shares if you're shorting. You just buy them if you want to go long. The broker will handle finding shares to lend to you if you want to short. Liquidity is a separate problem, which is why you might have low spreads or not even be able to find shares to short in the first place. Your ability to short a stock is not guaranteed and up to the market conditions and broker risk. And like I described, if you borrow shares to short and the prices increases greatly, then the broker will margin call your account to buy them back forcefully.
    - southerndrift 7y ago
      I am not asking what happens if I short shares but if I lend to others my shares. If the broker cannot buy those shares back, I face the risk of losing them, don't I? So I am wondering: does using those brokers come with the risk that I end up owning nothing if I pick a very successful stock?