box spreads versus exchange traded financing

ScroogeMcDuck

ScroogeMcDuck

I've been using box spreads for financing for a few years to get even lower rates than IBKR's margin. But why can't we directly trade financing on an exchange instead of doing it through the backdoor with box spreads?

Seems like that could be a way more efficient and liquid market for financing than box spreads fragmented across a zillion tickers. But maybe brokers want to keep it this way so that people keep overpaying for margin interest because they don't want to deal with the hassles of box spreads.
 
ScroogeMcDuck said:
I've been using box spreads for financing for a few years to get even lower rates than IBKR's margin. But why can't we directly trade financing on an exchange instead of doing it through the backdoor with box spreads?

Seems like that could be a way more efficient and liquid market for financing than box spreads fragmented across a zillion tickers. But maybe brokers want to keep it this way so that people keep overpaying for margin interest because they don't want to deal with the hassles of box spreads.
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Because trade financing is basically a p2p business which requires due diligence, a risk department to evaluate counterparty risk, collateral management and calling in additional collateral for when you get in trouble.
Let's say you want to borrow a million from the market, who is gonna watch what you're doing with the money? Who checks your collateral? Who is gonna come for your house in case you blow up? Would you really think it is a good idea to collateralize your cash balance to get a margin loan which in turn you can go all in with TSLA OTM weeklies??
Trust me, this is an entire new infrastructure which need's to be setup and you just cannot do that on exchange without integrating risk checks on your brokers side.

That's one of the reasons why crypto is so good because there actually is a centralized borrow/lend market via FTX. They can do it because you're already onboarded and your cash balance acts as collateral for the loan...which of course you can also lend out to other borrowers yourself. You can also lend your long positions out to short sellers for interest.

Box spreads on the other hand are just asset positions that mimic the average market rate, which is always better than retail rates. It is determined by the average borrowing rate of big institutions instead of your broker. Remember, the biggest business for brokers is NOT the commission, but borrowing cash and stocks from their clients for free and lending them out for a hefty rate :)
 
MrMuppet said:
Remember, the biggest business for brokers is NOT the commission, but borrowing cash and stocks from their clients for free and lending them out for a hefty rate :)
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Further to that, I've occasionally found stocks/etfs I would like to buy explicitly to be lent out, (along with certain hedges for protection), but the IB short stock program only gives me 50% of the interest received on lent shares. I've shrugged my shoulders and walked away to work on more important things.

My quesiton to @MrMuppet or anyone else knowledgeable: Is it possible for retail to lend shares and retain something close to the market short interest rates or is this a fantasy that is only really possible for institutions??

@ScroogeMcDuck : Hope you don't mind... I don't mean to hijack your thread. :)
 
Statistical Trader said:
Further to that, I've occasionally found stocks/etfs I would like to buy explicitly to be lent out, (along with certain hedges for protection), but the IB short stock program only gives me 50% of the interest received on lent shares. I've shrugged my shoulders and walked away to work on more important things.

My quesiton to @MrMuppet or anyone else knowledgeable: Is it possible for retail to lend shares and retain something close to the market short interest rates or is this a fantasy that is only really possible for institutions??

@ScroogeMcDuck : Hope you don't mind... I don't mean to hijack your thread. :)
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By doing a combo in a hard to borrow stock, you will essentially get the full short rate instead of sharing it with IB. The short rate is "written in" the price of the options.

So instead of being long stock, you would be long calls and short puts of the same strike. You would want to pick farther out of the money strikes, as in the money ones would have calls that "should" be exercised.
 
ScroogeMcDuck said:
"How would they handle the counterparty risk and collateral?"

The same way they do it when you use box spreads.
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not quite. If you want a credit from the market by using something else but your cash balance (or tresuries), how would you handle that?
If you just want margin as leverage by using your cash balance as colateral, that's your brokers business and they wouldn't want anyone to cut them by trading margin loans on exchange :)
 
Statistical Trader said:
Further to that, I've occasionally found stocks/etfs I would like to buy explicitly to be lent out, (along with certain hedges for protection), but the IB short stock program only gives me 50% of the interest received on lent shares. I've shrugged my shoulders and walked away to work on more important things.

My quesiton to @MrMuppet or anyone else knowledgeable: Is it possible for retail to lend shares and retain something close to the market short interest rates or is this a fantasy that is only really possible for institutions??

@ScroogeMcDuck : Hope you don't mind... I don't mean to hijack your thread. :)
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it's absolutely not possible to get close to market rates because securities lending is heavily regulated. This in turn costs a ton of money to facilitate the red tape so anyone who forwards you the lending rates 1:1 would be out of business by the end of the year unless you are charged on another end
 
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