1

After doing some research, literature suggests that "most" securities lending happens over the counter as opposed to securities trading which is mostly done through a centralized electronic exchange.

What alternatives are there to over the counter for securities lending? is there any type of electronic market for securities lending?

How do borrowers source lenders? for example lets say I want to borrow a million shares of company A, how do I find an investment fund that has a million shares of company A.

I have found many resources online including this detailed PDF: https://www.iosco.org/library/pubdocs/pdf/IOSCOPD96.pdf. However unfortunately nobody talks about the process of how lenders and borrowers are matched up.

Also how are pricing/lending fees determined? with security trading in an electronic market pricing is mark to market, even in OTC securities trading the pricing can be determined based on activity in the broader market.

If there is no "market" for securities lending how do you structure the pricing? for example lets say a mutual fund loan a million shares of company A to a hedge fund with a fee of 1%, how is the mutual fund sure it found a competitive fee, maybe there is another hedge fund that would have agreed to 1.1%

I would appreciate if anyone with experience in security lending could shed some light, or provide some reading materials/resources.

  • 2
    Retail borrowing for shorting is handled by the broker. I would imagine that institutional borrowing/lending is handled by the trading desk of investment banks. – Bob Baerker Sep 4 '19 at 14:49
  • 1
    Securities lending are never cheap, i.e. the interest fee charges range from 7% ~12% or even higher. – mootmoot Sep 10 '19 at 15:30
2

How do borrowers source lenders?

Short sellers do not need borrow directly from holders of the shares. Banks/prime brokers receive fees from short sellers and (sometimes) pay fees to long investors who own the shares.

Also how are pricing/lending fees determined?

Each prime broker may have a different lending fee available. Short sellers can choose which prime broker to borrow the shares from. Long investors can also choose where to hold their shares. For stocks with an active option market, you can also estimate the borrow fees (convenience yield) from the relationship between the current stock price, expected dividends, and forward price.

|improve this answer|||||

Your Answer

By clicking “Post Your Answer”, you agree to our terms of service, privacy policy and cookie policy

Not the answer you're looking for? Browse other questions tagged or ask your own question.