In the opening theme of “Pawn Stars,” owner Rick Harrison says “You never know what is going to come through that door.” Think back to the first trading day of this year. What were your expectations? On the stock loan desk, it was business as usual. After a busy Q4 2019, we looked to the year ahead for optimization and customer experience projects. Of course, we were reminded of Rick’s words when the S&P 500 Index fell 34% in March.
Broad market declines drive a contraction in short balances because investors take profits by covering short positions. Sometimes old shorts are replaced by new shorts, but that was not the case in March. Short sellers who opt to stay short actually pay a lower dollar-per-share borrow fee. Borrow fee interest rates are charged on the collateral value, which is marked-to-market daily. So short position holders continued to pay the borrow fee but on a lower principal balance. However, it also became more expensive to short via another factor. In March the Fed Funds Effective rate dropped from 1.58% to under 0.10%, and has stayed there. IBKR pays short credit interest to short holders according to this schedule. But with interest rates so low, traders are no longer accruing short credit or free credit interest.
The market bounced back, with the S&P 500 Index at all-time highs. So did short sale balances, buoyed by mark-to-market but also new opportunities. Our clients’ areas of focus are SPACs and IPOs. Post-merger SPACs have been especially volatile. Speculators express directional views but also attempt to derive profit from trades based on corporate actions. This drives up demand and borrow fees. The IPO market has been exceptionally strong in both issuance volume and performance. It does not seem to be slowing down heading into 2021. But not everyone believes the hype, judging by borrow fees. For US-listed IPO’s with at least $50M in deal size, the average daily borrow fee from listing date to present is 9%. That fee distribution is compressed more towards the immediate post-listing period. Biotechnology stocks pop up on our radar when there is news but unfortunately for prospective short sellers, low share floats and shareholder concentration preclude widespread shorting. China ADRs continue to be active but have taken a back seat. We see counterparty borrow demand for equity products which track cryptocurrencies. Participants in IBKR’s Stock Yield Enhancement Program have had consistent utilization there.
The IBKR stock loan desk wishes our clients a happy and safe New Year.
Disclosure: Interactive Brokers
The analysis in this material is provided for information only and is not and should not be construed as an offer to sell or the solicitation of an offer to buy any security. To the extent that this material discusses general market activity, industry or sector trends or other broad-based economic or political conditions, it should not be construed as research or investment advice. To the extent that it includes references to specific securities, commodities, currencies, or other instruments, those references do not constitute a recommendation by IBKR to buy, sell or hold such investments. This material does not and is not intended to take into account the particular financial conditions, investment objectives or requirements of individual customers. Before acting on this material, you should consider whether it is suitable for your particular circumstances and, as necessary, seek professional advice.
Disclosure: Margin Trading
Trading on margin is only for sophisticated investors with high risk tolerance. You may lose more than your initial investment.
For additional information regarding margin loan rates, see ibkr.com/interest