Were You Ready For What 2022 Was Cooking?

It’s seldom boring working on a trading desk, whether execution or lending, because every day the market is affected by new information which we must digest and utilize effectively to help our clients.   This year required a steady hand.  It helped if you took a few to the chin and learned some lessons during the last rising rate environment. 

The market peaked in January and we were operating as usual.  We spent our time on IPOs, SPACs and directional hard-to-borrows.  Then came the war in Ukraine, spiking interest rates and the crypto collapse.  The Nasdaq Composite suffered its worst performance (-33%) since 2008.  So how did this affect lending?

Shorts were active but in a more diffuse list of stocks.  There were so many to choose from… except for IPOs.  Issuance evaporated as valuations were discounted and companies wait for a calmer market.  Our clients were active in hard-to-borrow securities such as Digital World Acquisition Corp. (NASDAQ: DWAC), Lucid Group (NASDQ: LCID), the ARK Innovation ETF (NYSE: ARKK) and various fixed income ETFs.  Meme stocks popped up from time to time but action was short-lived.  Corporate action spread capture was dormant, with the only large deal being 3M Co.’s (NYSE: MMM) split-off of its food processing business Neogen (NASDAQ: NEOG).  We hear that depending on trade entry timing, it didn’t work out well for some arbitrageurs because the final exchange ratio figure was unexpected.

But the biggest story for lending desks was interest rates.  Many traders added Fed Funds futures to their real-time watchlists.  Fed Funds futures (CBOT: ZQ) can be transacted on Trader Workstation. 

In a bear market, shorts capture capital gains from selling high and buying low.  They also pay lower borrow fee amounts for the duration of the trade.  Borrow fees are charged on the collateral mark, which is marked-to-market daily.  If the mark decreases but the borrow fee rate stays the same, the fee rate is assessed on less principal, resulting in a lower dollar amount charge.  Additionally, IBKR clients get the benefit of short sale proceeds interest, which is Effective Fed Funds Rate minus 0.25% at the top tier.  Interest to short sellers is accrued daily and credited monthly.

Regular readers are familiar with the weekly Largest Short Values at IBKR ranking.  It does not include stocks with a borrow fee of less than 1% because otherwise the list would be mostly static.  But it’s exactly for the filtered “general collateral” names that higher interest rates become advantageous.  The borrow fees are low (around 0.25%) and at the top tier, shorts are credited 4.05% interest.   IBKR’s largest short value is the SPDR S&P 500 ETF (NYSE: SPY), followed by the Invesco QQQ Trust (NASDAQ: QQQ) with about half of SPY’s short value.  Nvidia (NASDAQ: NVDA), Apple Inc. (NASDAQ: AAPL) and the iShares 20+ Year Treasury Bond ETF (NASDAQ: TLT) round out the Top 5.

Each Securities Lending Desk (Greenwich, Zug, Hong Kong and Sydney) continued to refine its short availability systems to deepen support for both short sellers and Stock Yield Enhancement Program lenders.  It seems that has not gone unnoticed.  We are honored that Interactive Brokers was featured as a Top Prime Broker for hedge funds by Preqin, a data provider on alternative asset managers.

The securities lending market operates over-the-counter and can be opaque.  The new TWS Short Sale tab was created with transparency in mind.  It displays real-time lending data and a historical graph which overlays the stock price, borrow fee, volume and short availability.  Users can also see minute-by-minute Shortable Shares.   Similar data is available from vendors but those logins cost hundreds of dollars per month.  We felt that IBKR clients should receive it for free.  A popular topic with hedge funds right now is AMC Entertainment Holdings (NYSE: AMC) and its preferred units (NYSE: APE).  The Short Selling tab is a great way to review shorting metrics for either symbol at each point in the news cycle.  

Planning for 2023 projects which will enhance the client experience is underway.  We can’t quite talk about them yet, but they will be announced on the News at IBKR page.  We expect IPO activity to pick up moderately, but not SPACs. 

As the New Year approaches and procrastinators are executing last-minute tax harvesting trades, we wish you high risk-adjusted returns in 2023.  As a broker, we think you will appreciate that.

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.

The views and opinions expressed herein are those of the author and do not necessarily reflect the views of Interactive Brokers, its affiliates, or its employees.

Disclosure: ETFs

Any discussion or mention of an ETF is not to be construed as recommendation, promotion or solicitation. All investors should review and consider associated investment risks, charges and expenses of the investment company or fund prior to investing. Before acting on this material, you should consider whether it is suitable for your particular circumstances and, as necessary, seek professional advice.

Disclosure: Order Types / TWS

The order types available through Interactive Brokers LLC’s Trader Workstation are designed to help you limit your loss and/or lock in a profit. Market conditions and other factors may affect execution. In general, orders guarantee a fill or guarantee a price, but not both. In extreme market conditions, an order may either be executed at a different price than anticipated or may not be filled in the marketplace.

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