Short sellers pay a stock borrow expense for every short position they have in their portfolios based on the amount of shares shorted, price of the stock and borrow fee of that particular stock. These financing expenses are revenues for counterparties that help supply the stock borrows for short sellers. The stocks with the largest daily revenues are:
Beneficial owners, custodians, agency lenders, brokers and prime brokers each get a piece of the revenues generated by these short sales. The split varies on a stock-by-stock and transactional basis, depending how many and what type of counterparties are involved in the stockâ€™s journey to the short seller and who is the primary source of the borrow. A stock borrow may travel a circuitous route to its short seller, going from beneficial owner to custody bank, to several brokers in between before finally getting into the hands of a prime broker who uses the shares to deliver on a short sale. Or the trip can be very short, coming directly from a prime brokerâ€™s margin account and settling the short trade.
The overall spread on general collateral stocks (the easiest and cheapest to borrow securities) is very thin and each link in the stock borrow chain receives only a handful of basis points for their part in the transaction. The enormous size of the general collateral stock borrow market more than makes up for the thin spreads. On the other hand, non-general collateral stocks offer wider spreads, but usually a much smaller total notional borrow per stock.
In 2019, short selling in general collateral stocks made up over 91% of all short selling activity, but brought in only 40% of the stock lendersâ€™ earnings. Short selling in â€śhotâ€ť securities, stocks with over 10% fee stock borrow rates such as Beyond Meat Inc (BYND), made up less than 1.5% of all short sales, but generated almost 43% of all revenues.
Lending general collateral stock keeps the lights on for the various participants in the stock loan market, but having just a few of the expensive â€śhard to borrowâ€ť stocks such as BYND, CGC, OSTK or LYFT in their lending programs can make a trading deskâ€™s year. Using our Black App or our Blacklight SaaS platform, an institutional or retail client can spot the hot stocks in a portfolio that can boost net of financing Alpha. And daily monitoring makes sure borrowing and lending rates are always at market levels.
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Managing Director Predictive Analytics, S3 Partners, LLC
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