I don't understand, it seems like "securities lending" [1] is designed for the sole purpose of allowing this kind of speculation ("short selling").
Is there any other reason one would borrow securities?
Is there any other reason one would borrow securities?
1. You could have exposure to an asset that you want to hedge. So being able to purchase a financial instrument that's negatively correlated with an asset price is useful.
2. Putting downward price pressure on an asset sends an important market signal and reduces volatility
3. It provides income to owners of this asset as they have an option to lend to others and earn interest off of that.
4. Practically speaking, if you own something and you're free to sell it, and you can make an agreement to purchase at a future date at a specified price. So I don't see how you could be unable to lend it without arbitrary restriction around your ownership rights
There are three questions you should ask instead of one:
- Is there any reason for a borrower to borrow stocks other than betting that a stock is going to go down? The answer to that is basically "no". That's the main reason to do it. There are a few weird edge cases which are the exception to this general rule.
- Is there any reason for a lender to loan out stock? If I run a mutual fund, most of my stock is just sitting in a big dusty pile most of the time, doing nothing. I give the impression to my customers that I'm constantly buying and selling, but really, I just buy and hold most of the time. My main problem as a mutual fund manager is not the market going up or down. All of my peers are in the same market. My main problem is figuring out how to get a tiny edge over the other mutual fund managers, so my fund is on the top of the list at the end of the year. If I lend out my stock, my mutual fund might make a quarter of a percent per year extra. That's usually enough to bring my mutual fund up to the top of the list, relative to my peers. Profit.
- What is the benefit to the market of stock lending? As others have pointed out, the exact language you use to describe this transaction can be interpreted in a negative way. My opinion is that markets that allow this type of bet are much more resilient when the market inevitably turns down. Markets that don't allow stock lending tend to have artificially high prices for a long period of time, and inevitably crash hard. So, I think stock lending is a good thing. It evens out the highs and lows better.
The over simplified version of how to make money on this is person A owns the stock, they lend it to person B who lives in the country. Person B gets the cash payment, returns the stock, and some of the cash payment to A. When B "borrows" a stock, they are the owner of the stock, plus they have a contract to give the stock back to A at some future date. So it's legal.
Last I heard, this was being phased out by one country after another. Each year, there was less and less opportunity to make any money. It might be totally gone now.
So for eg a company like Tesla, securities borrowing and short sellers make it so that effectively there are more shares to buy on the market for people who want to go long.