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Opinion on Lending out Shares to Schwab at 8.5%?


wescobrk
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4 hours ago, wescobrk said:

Morning, please chime in with any thoughts about returning a voice mail to Schwab about lending out shares in my personal account at 8.5% for a security I own that they want to lend out.

 

Thanks.

What do you have to lose?  Evaluate the pros and cons.  The only downside that I can see is as follows: to lend securities, your securities must be in a margin account.  Thus, they are commingled with the  other securities including the firm's securities.  If Schwab goes bankrupt, then you may not get all of your money back if you exceed SIPC + insurance limits.  

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53 minutes ago, Dinar said:

What do you have to lose?  Evaluate the pros and cons.  The only downside that I can see is as follows: to lend securities, your securities must be in a margin account.  Thus, they are commingled with the  other securities including the firm's securities.  If Schwab goes bankrupt, then you may not get all of your money back if you exceed SIPC + insurance limits.  

 

I think there is a centralized clearing system that also backs lending out shares so if a broker fails, that clearing system will jointly pay up for it.

Even if you don't lend out your shares, if Schwab goes chp11, you still may not get all your money back if you exceed SIPC+insurance limits.

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2 minutes ago, muscleman said:

 

I think there is a centralized clearing system that also backs lending out shares so if a broker fails, that clearing system will jointly pay up for it.

Even if you don't lend out your shares, if Schwab goes chp11, you still may not get all your money back if you exceed SIPC+insurance limits.

There is a difference between securities in margin and non-margin accounts.

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Real question  is if Chuck is giving you 8.5% it’s probably lending out at at least double that, so I’d focus on getting comfy with the fact that someone out there is maybe paying 16% or more to bet against you.
 

I think that’s more important than the tail risk of securities lending.

 

it’s an invitation to recheck the thesis if demand for borrow is spiking

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3 hours ago, thepupil said:

Real question  is if Chuck is giving you 8.5% it’s probably lending out at at least double that, so I’d focus on getting comfy with the fact that someone out there is maybe paying 16% or more to bet against you.
 

I think that’s more important than the tail risk of securities lending.

 

it’s an invitation to recheck the thesis if demand for borrow is spiking

 

Do you recheck your thesis if someone is willing to sell shares to you? It's a similar thing.

 

I don't put much weight into academic studies but there have been a few that says high short interest isn't a meaningful indicator. I think it's like anything, there is always someone with an opposing opinion to yours, that's what makes markets. 

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4 hours ago, muscleman said:

 

I think there is a centralized clearing system that also backs lending out shares so if a broker fails, that clearing system will jointly pay up for it.

Even if you don't lend out your shares, if Schwab goes chp11, you still may not get all your money back if you exceed SIPC+insurance limits.

 

When was the last time a large retail broker failed? Lehman Brothers?

 

I think the risk is very small, for any established broker I would not give it much thought. If I was at Robinhood, well, I would give it quite some thought.

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6 minutes ago, ValueArb said:

 

Do you recheck your thesis if someone is willing to sell shares to you? It's a similar thing.

 

I don't put much weight into academic studies but there have been a few that says high short interest isn't a meaningful indicator. I think it's like anything, there is always someone with an opposing opinion to yours, that's what makes markets. 

Eh there's actually a good bit of evidence that spiking short interest/borrow rate is bullish. It prompts short covering from the cheapskates who dont want to pay it which then jacks up the bid which then results in the squeeze due to a rising share price and lack of locate as previous locates get sold. High borrow cost is one of the things you look for is you're looking to go long a squeeze and its also one of the things you are taught to avoid if looking to enter a short. 

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Agree to disagree with both of you. 
 

heavy short interest is typically a good indicator for LT underperformance (gross of borrow ). 
 

2021 is obviously a huge exception. And boy were the exceptions glorious! 

 

I sthink if something is super high borrow you and it’s spiking, you should you at very least make effort to understand. 
 

shorts have been really burned after 2021 and people are gonna have a very high bar for shorting a crowded name 

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33 minutes ago, Gregmal said:

Eh there's actually a good bit of evidence that spiking short interest/borrow rate is bullish. It prompts short covering from the cheapskates who dont want to pay it which then jacks up the bid which then results in the squeeze due to a rising share price and lack of locate as previous locates get sold. High borrow cost is one of the things you look for is you're looking to go long a squeeze and its also one of the things you are taught to avoid if looking to enter a short. 

 

You make good points, thanks Greg.

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To be clear l, I’m not saying “sell the stock because a lot of people are shorting it”

 

I agree shorts can provide rocket fuel (some personal examples: the office REITs we’re all 10-15% short when the vaccine came out and probably overshot fundamentals on covering, short covering (and Lully promotion)helped JOE overshoot IMO.

 

all I’m saying is I’d pay more attention to bear case with something that’s heavily shorted than something that’s GC…

 

 

Edited by thepupil
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In that case I'd agree. But short interest and borrow rates fluctuate like the temperature and are typically short term phenomenon. You are probably 99% accurate, at least from my long list of recollections in that the long term prognosis is terrible if you track those companies. That said, even with eventual 0 SHLD, every instance I can remember where borrow went over 50% annually it was a great long for the next few weeks. Man I miss that one. We'll probably never find out but I always had a suspicion something was going on there cuz Eddy almost always waited for the borrow spike to drop a form 4. Then you'd get a 50% rip. Rinse, repeat. TLRY too that mega squeeze started after the borrow went from like 25% to 500% in a few days. Then the shares went from about $80 to $250.

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1 hour ago, ValueArb said:

 

Do you recheck your thesis if someone is willing to sell shares to you? It's a similar thing.

 

I don't put much weight into academic studies but there have been a few that says high short interest isn't a meaningful indicator. I think it's like anything, there is always someone with an opposing opinion to yours, that's what makes markets. 

I think high short interest is a yellow flag at least. Generally speaking, shorts are not dummies, more often than not stocks with high short interests have issues and it does not hurt to find out what they might be.

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One drawback I didn't see mentioned is that if it's a dividend paying stock, then you technically no longer get the dividend. Instead you get paid cash in lieu of a dividend by the person who borrowed the stock from you. It's the same amount of cash, but you don't get the preferential dividend tax rate.

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11 hours ago, Seanzy said:

Does Buffett, Berkshire, or a subsidiary lend out shares?

 

I'm not sure and I'm not sure what that matters?

 

Buffett thought subprime in 2007 wouldn't cause be "big impact to the economy" and he thought 2020 would bring on another depression. 

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20 hours ago, stahleyp said:

I'd check IB to see what they're paying. They split it 50%/50%.

 

I looked into this with IB - Interactive Brokers  - it is their:

Stock Yield Enhancement Program

 

They talk about providing you with cash collateral up to the value of the stock - but I wonder what happens if the stock suddenly rises in value by a lot. This is the time when the person who has borrowed it is most at risk of defaulting on returning it, and it is not clear whether the brokerage has the obligation to obtain replacement stock for you, or whether the collateral alone satisfies the broker's obligation to you (i.e. you would lose access to the gain in the stock price).

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2 hours ago, neil9327 said:

I looked into this with IB - Interactive Brokers  - it is their:

Stock Yield Enhancement Program

 

They talk about providing you with cash collateral up to the value of the stock - but I wonder what happens if the stock suddenly rises in value by a lot. This is the time when the person who has borrowed it is most at risk of defaulting on returning it, and it is not clear whether the brokerage has the obligation to obtain replacement stock for you, or whether the collateral alone satisfies the broker's obligation to you (i.e. you would lose access to the gain in the stock price).

 

I don't remember hearing any complaints in the GME, AMC, etc rally of last year. 

 

I'd imagine all of these guys are offering more or less than same thing but IB splits more of it with clients. 


With that being said, I do use their lending program but I don't have a ton of money doing it so I haven't really dug into the details. For better or worse, I trust IB (ethically...not necessarily customer service wise) more than any other brokerage. 

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