Securities lending desks expected an exciting ride upon returning from their staycations on January 4, 2021. We were not disappointed, starting with the political upheaval of January 6th.
Then came the meme stock frenzy, which forced lending traders who are not redditors to familiarize ourselves with the platform. The younger members of our team took point on monitoring what was happening and educating those of us who grew up with AOL. Behind the scenes, lending traders attempt to balance supply and demand with strong inventory management to (1) support short sellers who want to execute and (2) avoid involuntary buy-in’s of current shorts due to delivery obligations or counterparty buy-in’s. We are proud of the fact that there were no involuntary short positions closures for IBKR customers in Gamestop (GME) and AMC Entertainment (AMC) this year. But there were some close calls. Looking towards 2022, some meme issuers held additional share offerings last summer and we are not currently experiencing issues with availability.
The IPO market had its biggest issuance year ever and post-IPO shares continued to be in high demand. We worked to enhance short availability of recently IPO’d shares and Direct Listings to meet that demand.
Chinese ADRs in particular took center stage during H1 of the Year of the Ox, with issuance also beating previous records. We continued seeing shorting take-up directly after the IPO offering. Trader Workstation users can easily track previous and upcoming IPOs in the Event Calendar. The Chinese ADR shorting market has cooled due to a dearth of supply and lockup expiries which release more lendable shares into the market, depressing borrow fees. The PRC’s regulatory environment may encourage mainland companies to list in Hong Kong instead of abroad. The Hong Kong Exchange (HKEX) has different rules for IPO allocations than the US, where retail investors as a group will receive some allocation from the retail “tranche” if their broker supports submission of their bids. Please see this page for more information. HK stocks are also eligible for SYEP, so holders may collect extra income from lending them to IBKR. We expect the HK shorting market to become more active in 2022 due to these developments.
No discussion about the primary market is complete without SPACs. De-SPAC’d names were the hottest items throughout the year. Hottest means they had the highest borrow fees with the most imbalance between demand (a lot) and supply (not enough). These names are actively managed by IBKR’s securities lending traders – monitoring client trading activity and attempting to secure borrow. Demand comes from fast money directional players but also funds which endeavor to arbitrage the corporate actions embedded in SPAC structures. Yet we have seen cases where the adage of “the market can remain irrational longer than you can remain solvent” played out. The risks of shorting can be more acute with SPACs so we encourage clients to take that into consideration.
Has cryptocurrency become mainstream? Not quite but grandma can buy it at IBKR now. We were the first to offer Bitcoin futures in 2017 and rolled out trading of the physical this year. Short demand is there for crypto ETFs and crypto-related issuers are particularly volatile. Having said that: a diversifying investor base, increased trading and a shakeout of the more speculative issuers have increased stability relative to 2017. We received more inquiries on basis trades than shorting, mainly due to plenty of ETP availability to meet demand, obviating the need for desk intervention.
We end the year confident about 2022 and proud of our accomplishments during 2021. The desk’s goal is to make shorting a seamless and cost-effective way for IBKR clients to hedge, express a view or capture a spread. We feel that we rose to the challenge this year and look forward to rolling out more functionality during the next. Keep riding with us, the journey only gets better from here.
Disclosure: Interactive Brokers
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