It has been a busy year on stock loan desks but activity has slowed down in the past month. Usually there are a small number of very hard-to-borrow names with large floats such as Nikola Corp (NASDAQ: NKLA), which was hot in the summer. Read IBKR’s Securities Lending Desk reports here.
Stock Loan traders spend time managing the inventory manually, to balance supply with demand. This includes finding locates to support customer shorting and trying to prevent buy-ins. As this commentary frequently mentions, preventing buy-in’s is the #1 priority of every desk, followed closely by supporting new activity. Currently these efforts are diffused across more tickers, as shorting demand has become less concentrated. IBKR had tremendous growth in new accounts in 2020 and the aggregation tools we have developed allow the desk to maintain shortability of in-demand names across more customers.
Last year’s focus on IPOs continued. The IPO market has been one of the most active in recent memory. We see more shorting interest in new issues priced at the lower end of their ranges versus the “blue chip” IPOs. This may be due to the strong performance of many post-IPO issues, as reflected in the +53% YTD return of the Renaissance IPO ETF (NYSE: IPO). The S&P 500 returned 5% YTD. The ETF’s top holdings are Zoom Video (NASDAQ: ZM), Uber (NYSE: UBER) and Pinduoduo (NASDAQ: PDD).
We are also seeing more traders trying to short stocks which ‘pop’ pre-market. These can be small cap biotech stocks. On Monday 9/14/20 Cassava Sciences (NASDAQ: SAVA) doubled from a $3- to a $7-handle around 8:00AM EST. News was released regarding Phase 2 trials of an Alzheimer’s drug. Traders run screens in the morning to identify these large moves and borrow demand escalates quickly. With a pre-pop market cap of $75M, supply of SAVA borrow was not abundant. Lenders are not oblivious to this and the borrow fee surged from 5% to 11% with some shorts paying up to 26%. We have seen evidence of borrow fees increasing further in the days following a large move in small caps.
There are two main reasons why price spikes affect supply and therefore fees. The first is that more traders start paying attention and attempt to short. But the second is long sales. Pre-pop holders which were lending shares may take profits, resulting in a termination of the loan contract. The carrying broker has an obligation to deliver sold shares to the depository for settlement versus payment. Ultimately the previously lent shares end up in the buyer’s account. If or when those shares will re-enter the lending market depends on a few factors. Is the new holder’s clearing firm able to lend shares if the buyer is taking a margin loan against SAVA collateral? Can the long holder lend them by participating in a fully-paid lending program like IBKR’s Stock Yield Enhancement? Even if the answer to both is “yes,” how swift is the turnaround? Will it occur in the timeframe to take advantage of outsized price moves? This depends on the broker’s level of technology. At IBKR, automation enables shares to be made available for shorting a few minutes after they are received at the depository.
Disclosure: Interactive Brokers
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Disclosure: Margin Trading
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