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Comment by H8crilA | Hacker News Reader

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%.

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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?

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....

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?

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.

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?

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.

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?

The broker uses risk management, margin calls, market hedging, capital reserves and insurance coverage to ensure you always get your shares back. You're not really in any risk.

Capital markets are far bigger than you can imagine and unless you're holding millions of shares short (which is unlikely as a retail investor), it's not going to be an issue even with the most volatile penny stock.

In the miniscule chance that the shares are unable to be acquired for whatever reason, you would probably get reimbursed at the current market price, although I don't know the regulatory specifics around this and you should discuss the details with your specific broker.

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

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.

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?

No, this is about lending stock you own to short sellers because they’re not supposed to short naked.

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.

Ok, but where do my holdings in a mutual fund or ETF fit?

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.

No, they often lend out from cash accounts.

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