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Ask HN: Can I trust brokers with my stocks?

• aynyc 6y ago
  In the US, even reputable shops such as Vanguard lend shares out for short sellers. It’s one way to keep the fee low for consumers. I never heard of anyone losing their shares due to short sellers.
• cjg_ 6y ago
  Avanza supports loaning out stocks depending on the account type, it is only available on Kapitalförsäkring because otherwise the stock is in your name (on Depå / ISK). Also you get paid a premium if they loan your stocks. It is described on https://www.avanza.se/konton-lan-prislista/konton/kapitalforsakring/aktielan.html https://www.avanza.se/konton-lan-prislista/konton/kapitalfor... and includes a section about the risk.
  • jeofken 6y ago
    Can you use ISK when living outside of Sweden, and still enjoy the low tax and no capital gains tax?
    • anticristi 6y ago
      This depends on your country's tax code, but assume by default not. For example, in France, interest on savings (Livret A) is tax exempt, whereas in Sweden it's not. When living in Sweden, I had to pay taxes on French interest.
    • shinryuu 6y ago
      No, I'm a swede living in Germany
  • anticristi 6y ago
    Awesome answer and good to know they are so transparent about this. Wish their customer service had given me the same answer.
• gerdemb 6y ago
  Interactive Brokers has a stock lending program and shares half the profits with their customers who opt-in. They are transparent about how it works. (Basically they deposit cash collateral to your account to cover the stocks they’ve lent out). https://ibkr.info/article/1839 https://ibkr.info/article/1839 I think many other brokers do basically same, but aren’t transparent and don’t share the profits.
  • peterkouvaris 6y ago
    Seconding IBKR. I've always viewed them as the most ethical broker and also the one with the highest skill ceiling. They do not sell order flow, they offer programs like the above so you can earn interest when they loan your shares out to other individuals or institutions, and let you get very granular about things like your exchange routing.
    • seaman1921 6y ago
      You should watch their CEO Thomas Peterffy's interview during the gamestop situation - he basically said "shorting is illegal" and a lot of other such nonsense .. completely lost respect for IB after that, even though I still maintain an account. https://streamable.com/ycdec9 https://streamable.com/ycdec9
      • mortehu 6y ago
        That's a long video. Can you link directly to the nonsensical statement you're referring to?
        • delvinj 6y ago
          He says "so short squeezes are illegal" at about 3:30
        • nayuki 6y ago
          Thomas says a lot of nonsensical things during those 4 minutes. He keeps on continually referring to the trading prices of GameStop, basically belittling the market price of $100~200 and continually insisting that it is a company worth a lot less (somewhere below $50, I forget). Even though he runs a brokerage firm, his personal opinion is very non-neutral and he wants to dictate a market direction.
• miltondts 6y ago
  I'm not sure, but I think Degiro offers several account types, and at least one of them (custody) doesn't allow that type of behavior. https://www.degiro.co.uk/helpcenter/faq/profiles/1068 https://www.degiro.co.uk/helpcenter/faq/profiles/1068
• 11thEarlOfMar 6y ago
  Stick to large, well known firms. In the US, that's Fidelity, Vanguard, Schwab, eTrade, ... There are few 'fintech' players that have the weighty balance sheet you'd want when major market events occur. Trades are pretty cheap, even $0 for most standard trades on Schwab[0]. [0] https://www.schwab.com/pricing https://www.schwab.com/pricing
  • eatonphil 6y ago
    I think almost every platform made trades free in December 2019. In any case Bank of America/Merrill Edge also has free trades.
• kasey_junk 6y ago
  If you are worried about that wait until you learn about Cede & Co. On US listed stocks there is a very good chance you don’t own them at all. You just have certain contractual rights to them. (Note: I believe the counter party risk with lending for shorts or Cede & Co custody is extremely far down the list when talking about risks in the equities market)
  • dmw_ng 6y ago
    You can order physical delivery of certificates from them if you want, but absolutely nobody actually wants this, not least because you'll have to pay for all the silly labour involved, and pay for it all over again if you ever intend to sell what you own. It's exactly like worrying about Visa/Mastercard trying to fuck you when paying for gas in a foreign currency, while ignoring the massive convenience and cost efficiencies you receive in return. Failure of the depository system is no more likely than failure of the bond market -- and even if it did fail, the paper trail means you'd have extremely strong and obvious claims to whatever it is you happen to own. If you're worried about such critical infrastructure failing, just go live in a cave or renovated nuclear bunker, because that means cash is dead to you too. Cede & Co conspiracy theories are a non-issue, and absolutely nobody wants the alternative, which involved fleets of bicycle couriers carrying actual physical certificates between brokers, and caused so much overhead that the US market system reached the point of total collapse prior to introduction of the depository, resulting at one point in the stock exchanges closing for one business day per week simply to allow brokers time catch up on all the paper mess.
• jmillikin 6y ago
  The answer varies depending on brokerage, legal jurisdiction, and your account status(es). I wasn't able to find good English-language information on Swedish consumer financial regulation, and I suspect this particular concern is not one that is asked regularly. That said, the following rules of thumb for American brokerages might be of interest: * Securities held in cash accounts are not loaned out without the customer's approval. Brokers may offer a revenue-sharing agreement, for example IBKR's "Stock Yield Enhancement Program" at <https://www.interactivebrokers.com/en/index.php?f=46942 https://www.interactivebrokers.com/en/index.php?f=46942>. * Margin account agreements usually have wording allowing the broker to loan out securities held on margin. This is important for holders of dividend-producing equities in a margin account, because taxation of "payments in lieu" is different from that of qualified dividends. * In both cases, loaned securities are covered by cash collateral. The exact percentage varies between brokers; as one data point, IBKR collateralizes the loan at 102% [0]. * Retail brokerages have insurance on the first $500k USD of assets per account, including $250k of cash, through the SIPC[1]. This is designed to protect customer assets if your brokerage enters liquidation, and although it doesn't protect loaned shares, it does protect your retail account from being impaired by another customer's short going wrong. [0] https://gdcdyn.interactivebrokers.com/Universal/servlet/Registration_v2.formSampleView?file=SecuritiesLendingDisclosure.html https://gdcdyn.interactivebrokers.com/Universal/servlet/Regi... [1] https://en.wikipedia.org/wiki/Securities_Investor_Protection_Corporation https://en.wikipedia.org/wiki/Securities_Investor_Protection...
  • oa335 6y ago
    Let’s say I have a margin account and own 100 shares of GME. My broker then lends out those shares of GME to a hedge fund. What would have to happen for me to never get my shares back? I assume if the hedge fund goes bankrupt, it’s clearing firm would be on the hook? If the clearing firm also goes bankrupt (which has happened before), then what?
    • hrgiger 6y ago
      They are regulated related by their local authorities US,EU etc... Each country has their own retail protection law, as far as I remember the amount changes from 100k$ up to 800k$. So if I am correct it is not based on transaction but the value of your account.
• portmanteaufu 6y ago
  Disclaimer: IANAL or a financial expert. This information is relevant in the US, but Swedish brokerages may do something similar. In the US, brokers cannot lend out your shares without your knowledge. Brokerage customers can opt into a program called Fully Paid [Securities] Lending, in which the broker pays you a monthly fee to lend your shares out to short sellers. The fee you're paid is higher for securities that are harder to come by; shares of an up and coming marijuana company will be much more rare than large-cap stocks in the S&P 500. (Brokerages often own their own shares of popular stocks that they can lend out, so there's no need to pay customers for access to them.) You can recall the shares at any time, so they're still considered liquid. The only "catch" is that you can't vote as a shareholder without first recalling them. Here are some product pages for FPL programs run by Schwab[1] and Fidelity[2]. Most (all?) large US-based brokerages seem to offer this in some form. [1] https://client.schwab.com/secure/file/P-5182696/MKT33373-05.pdf https://client.schwab.com/secure/file/P-5182696/MKT33373-05.... [2] https://www.fidelity.com/trading/fully-paid-lending https://www.fidelity.com/trading/fully-paid-lending
  • Waterluvian 6y ago
    My understanding is that this ability to lend out shares is broadly the default option for services like Robin Hood and TD Ameritrade.
    • freddie_mercury 6y ago
      I believe you need to upgrade to the premium Robinhood Gold before they can lend shares. It isn't the default, AFAIK. But a lot of people who post online about trading (selection bias) use Robinhood Gold.
      • Waterluvian 6y ago
        Ahhh thanks. I had heard so many times about this. Everyone on WSB telling everyone to call up and get it disabled.
  • tony0x02 6y ago
• adamwi 6y ago
  Seems like Avanza competitor Nordnet is fairly transparent about loaning out your stocks. On by default for some account types (when the stocks are not in your name, e.g. KF account type). They will give you a cut of the gains. You can chose to opt out. https://www.nordnet.se/se/marknad/aktier/aktielaneprogrammet https://www.nordnet.se/se/marknad/aktier/aktielaneprogrammet
• simonbarker87 6y ago
  I’m not a lawyer but own a number of shares in a number of companies through IG in the UK. Since you don’t really own the shares, the broker (in my case IG) hold them on my behalf in a ledger that simply allocates the shares to me then I imagine they can do what they like with the shares. So long as the money is there when you want to liquidate it then it’s irrelevant to some degree. In the UK the value of the shares I believe is fenced off in a separate entity so that should the broker go bankrupt the money is still there for shareholders (ie shares bought in the platform, not shareholders in the brokerage) and inaccessible to creditors, this was tested in the high court in the UK recently when the administrators tried to use this ring fenced money to pay their fees as the broker couldn’t pay it themselves and the ring fence was upheld by the court. Not sure if any of this helps but it’s good to remember you don’t actually own the shares, they are held by someone else and they can probably do what they like with it.
  • anticristi 6y ago
    I have evidence that in Sweden you actually own the shares. I actually got a personal letter (read "paper delivered to my mailbox") from the CEO of SAS AB (the Scandinavian airlines).
    • simonbarker87 6y ago
      Cool, then yes you should definitely care what your brokerage is doing
  • mjul 6y ago
    In EU there are strict financial regulations about custody. Brokers are not allowed to do anything to your shares without your instruction. So, for example, if the broker goes bankrupt, the custody account with your shares is still there for you. I assume it is still the same in the UK post-brexit, but I have not looked it up.
• dmw_ng 6y ago
  If you really care about this you must also pay attention to funds you hold, as (AFAIK) the vast majority of providers earn extra yield by lending out their holdings https://www.investopedia.com/investing/role-securities-lending-etf-returns/ https://www.investopedia.com/investing/role-securities-lendi... > BlackRock, Inc. (BLK) managing director for securities lending Jason Strofs indicates that this is a significant business: "about $3 trillion of our assets we consider lendable, which consists of iShares ETFs, mutual funds, collective trusts, and separate accounts," he says. "Across that $3 trillion, roughly 9% of those securities are out on loan on any given day." SLB is a double-edged sword, for example since it increases float it may also work to reduce spread, reducing transaction costs for everyone
• i_am_the_ai 6y ago
  1. You can’t easily. 2. All of the money you invest.
• 2352500 6y ago
  There's only one thing that grows in someone else's hand, and it's not money...
• betterunix2 6y ago
  IANAL Technically you could lose shares loaned to short sellers, but it would happen under some pretty extreme circumstances. Basically, the short seller would have to go into default and be unable to return the shares; then, your brokerage would have to also be in default and be unable to buy the shares needed to return them to your account. I have never been in this situation but I think most brokerages would try to offer a cash settlement for the lost shares. If the brokerage is bankrupt and was unable to transfer your account to a solvent brokerage, then, as far as I know, you would be a creditor during the bankruptcy proceeding and would be "first in line" i.e. you would have to be paid before the bond- or stockholders of the company. To compensate for this sort of risk short sellers must make interest payments, and usually brokers will share the interest payments with the client that they borrowed shares from (and thus the client must know the shares are being loaned). [EDIT: Looked it up, should have done this beforehand; if your brokerage is in default, you would be entitled to withdraw the collateral the brokerage had deposited for the loaned shared.]
• ptr 6y ago
  You can opt out/opt in of stock borrowing on Avanza, there’s a setting.
• anonuser123456 6y ago
  >I asked the same two questions to my broker (Avanza in Sweden), and they haven't replied after 4 weeks. Get a new broker. I've had some fairly complex securities questions in the past and my broker (Fidelity) always had someone on the phone to talk it out with or inquire further and get back to me.
• jnurmine 6y ago
  1. Nordnet and Avanza both do this, but they let you opt out. Specifically to Avanza, if you have stocks in a kapitalförsäkring then you are automatically included and if you don't like this, you need to opt out. 2. Yes, looks like it. Have a look at https://www.avanza.se/konton-lan-prislista/konton/kapitalforsakring/aktielan.html https://www.avanza.se/konton-lan-prislista/konton/kapitalfor.... (Quick translation from the Avanza link: they have a security worth 105% of the value of the borrowed stocks, so if Morgan Stanley goes bankrupt, Avanza tries to buy the stocks back. If trading is stopped, or stocks cannot be bought back for other reasons, you'd be compensated monetarily.) Other countries may of course do things differently.
  • wodenokoto 6y ago
    My Swedish isn’t great, but is avanza saying that if you have a capital insurance then they are lending out your stocks ... that doesn’t sound like insurance at all.
    • jnurmine 6y ago
      I don't know what you define as insurance, but in this case it's basically something which contains things you can invest or save money to, and you get to name a beneficiary (e.g. your child/grandchild/wife/husband/etc.) who gets the money in case of your death. Plus some other details. Otherwise it like a "normal" brokerage account, except the tax rules are a bit different, no capital tax on profit but you pay a certain percentage based on the size of the insurance (which has details like in which quartal you moved money in). Dividends are not capital taxed, there's a "template tax". Losses cannot be deducted. Etc. Anyway, with the lending of your stocks the chance of everything going bad is very, very low, but of course it's still non-zero. I guess some people opt out not because of the inherent risk but because they don't like short selling as a concept.
• omgJustTest 6y ago
  1. Read reviews and documentation. Most brokers ask if it isn’t part of the signup process. 2. “No, on us stock exchanges”. Shorts (or anyone overextended ) will receive a house or margin call. These calls are to ensure contractual obligations on the market are met. The SEC requires brokers to make and report these incidents. Brokers are liable if they do not. Worst case: broker forces sales in overextended account, buys short shares and returns them to you. 2a. Finra protects assets in the case of broker insolvency, (avanza goes bankrupt). Your assets would be insured by the us govt. 2b. The SEC/nyse/others is suppose to make sure markets have trust, otherwise people won’t use the exchange.
• stunt 6y ago
  It's a common practice for big brokers to have a custody option where your securities are held separately (as far as you are concerned), but usually it comes with more fees. If you don't want to take the risk of brokerage lending, then you have to enable custody and agree to have some extra fees. Whether the benefits will outweight or not depends on your investment habits and which brokerage you use.