IB: Why do you earn more interest on short sale proceeds than on cash balance?

M

Maverick2608

Sorry for my ignorance.

IB currently pays 1.42% on positive USD cash balances.

When shorting stocks:
Rebate rate reflects the combination of the collateral interest to be received by the borrower less the fee to be received by the lender. A negative rate reflects a net charge to the borrower.

The rebate rate of stocks such as AAPL and AMZN is currently 1.66.

Why do you earn more on your short sale proceeds than on your cash balance?

What am I missing?
 
Where are you seeing that the total rebate is greater than 1.42%? Here's what I see:

Interest on cash balance = BM - 0.5% (BM currently is 1.92%) = 1.42%. This is paid on balances over $10k.

You have to pay a fee to borrow shares for shorting. The lowest fee I'm seeing in TWS right now is 0.25%. I'm pretty sure the interest on short sale proceeds is not inclusive of the short stock borrow fee. As such, you'll always be worse off shorting because the rate paid on short sales is a progressive scale. So even if you shorted $5M, you don't get the 1.67% (interest) - 0.25% (short borrow fee) on the full $5M, you only get it on $2M (above $3M is the 1.67% rate). The breakdown is this:

Interest paid on short sale proceeds = BM - SSPD (short sale proceed discount). SSPD is:
first $100k SSPD = BM
next $900k SSPD = 1.25%
next $2M SSPD = 0.5%
the rest SSPD = 0.25%

So using today's numbers:
First $100k in short sale proceeds = 0%
Next $900k = 0.67%
Next $2M = 1.42%
the rest = 1.67%

But again, you need to subtract the short stock borrow fee of 0.25%. Therefore, as your short sale proceeds approach infinity, your interest rate on those proceeds will approach, but never equal 1.42% (after 0.25% borrow fee) whereas your cash balance will approach 1.42% much faster (it's not exactly 1.42% either because the first $10k is at 0%).

Or for even more clarity, assuming the lowest borrow fee of 0.25%, the interest after borrow fee is as follows:
First $100k = -0.25%
Next $900k = 0.42%
Next $2M = 1.17%
the rest = 1.42%

Whereas interest on cash balance is as follows:
First $10k = 0%
the rest = 1.42%

Creating a piece-wise function to determine the difference in interest paid on cash vs interest paid on short sale proceeds is left as an exercise for the reader.

EDIT: I messed up the cutoffs for each percentage bracket. The percentages were correct, but the Next $X amounts were off.
 
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Lee- said:
Where are you seeing that the total rebate is greater than 1.42%? Here's what I see:

Interest on cash balance = BM - 0.5% (BM currently is 1.92%) = 1.42%. This is paid on balances over $10k.

You have to pay a fee to borrow shares for shorting. The lowest fee I'm seeing in TWS right now is 0.25%. I'm pretty sure the interest on short sale proceeds is not inclusive of the short stock borrow fee. As such, you'll always be worse off shorting because the rate paid on short sales is a progressive scale. So even if you shorted $5M, you don't get the 1.67% (interest) - 0.25% (short borrow fee) on the full $5M, you only get it on $2M (above $3M is the 1.67% rate). The breakdown is this:

Interest paid on short sale proceeds = BM - SSPD (short sale proceed discount). SSPD is:
first $100k SSPD = BM
next $800k SSPD = 1.25%
next $1.1M SSPD = 0.5%
the rest SSPD = 0.25%

So using today's numbers:
First $100k in short sale proceeds = 0%
Next $800k = 0.67%
Next $1.1M = 1.42%
the rest = 1.67%

But again, you need to subtract the short stock borrow fee of 0.25%. Therefore, as your short sale proceeds approach infinity, your interest rate on those proceeds will approach, but never equal 1.42% (after 0.25% borrow fee) whereas your cash balance will approach 1.42% much faster (it's not exactly 1.42% either because the first $10k is at 0%).

Or for even more clarity, assuming the lowest borrow fee of 0.25%, the interest after borrow fee is as follows:
First $100k = -0.25%
Next $800k = 0.42%
Next $1.1M = 1.17%
the rest = 1.42%

Whereas interest on cash balance is as follows:
First $10k = 0%
the rest = 1.42%

Creating a piece-wise function to determine the difference in interest paid on cash vs interest paid on short sale proceeds is left as an exercise for the reader.
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I had forgotten the progressive scale, so thank you for that.

With regards to:
"I'm pretty sure the interest on short sale proceeds is not inclusive of the short stock borrow fee."

When you use the Short Stock (SLB) Availability Tool in the Support > Tools menu in Account Management and look up e.g. AAPL, it says:

Current Rebate Rate* 1.6600
Current Fee Rate** 0.2500

*Rebate Convention (US/Canada)- reflects the combination of the collateral interest to be received by the borrower less the fee to be received by the lender. A negative rate reflects a net charge to the borrower.
**Fee Convention (Others)- reflects the rate charged to the borrower irrespective of the collateral interest rate.

Consequently, I think the 1.66 is the net amount after the fee has been subtracted.
 
Maverick2608 said:
I had forgotten the progressive scale, so thank you for that.

With regards to:
"I'm pretty sure the interest on short sale proceeds is not inclusive of the short stock borrow fee."

When you use the Short Stock (SLB) Availability Tool in the Support > Tools menu in Account Management and look up e.g. AAPL, it says:

Current Rebate Rate* 1.6600
Current Fee Rate** 0.2500

*Rebate Convention (US/Canada)- reflects the combination of the collateral interest to be received by the borrower less the fee to be received by the lender. A negative rate reflects a net charge to the borrower.
**Fee Convention (Others)- reflects the rate charged to the borrower irrespective of the collateral interest rate.

Consequently, I think the 1.66 is the net amount after the fee has been subtracted.
More...

I looked in the support -> tools as you said and I see the fine print that you listed (this fine print isn't available in TWS). I'm skeptical the fine print is accurate especially considering the way it's written doesn't have the rate break down on the progressive scale. I mean you could certainly make the case based on the SLB tool under support tools that IB is telling you the rate is 1.66% in the AAPL example on 100% of the short sale proceeds being that it's telling you the rate is 1.66% with no specific restriction that this is only on proceeds above $3M and the fine print does not mention this progressive scale whatsoever.

As such, I believe IB has made a mistake here and it's worth contacting their support to confirm. I'd be surprised if IB's short sale proceeds interest rate is greater than the cash, but I've been surprised in the past. ;)
 
When you short stocks you pay interest.

  • When you borrow the shares, you pay interest to the brokerage house for this loan, and the harder the shares are to find, the higher the interest rate, and I have seen examples of 20% interest per annum.
  • You may collect dividends, but you also pay them out to the person or persons you borrowed the shares from.
 
comagnum said:
When you short stocks you pay interest.
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you pay interest on hard to borrow but not on easy to borrow stock. on stocks like msft,ibm, etc. the lender of hard to borrow shares can demand payment for loaning out stock. payment is in the form of X% per annum. it is a fee not really an interest payment. the lender of the stock is fully collateralized because the proceeds from shorting the stock is credited to the account of the lender as collateral for lending the stock.

there is a old saying on wall street the bulls pay interest but the bears don't.
( I've see confusion on this issue for years. )
 
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I did not know IB passed on some of the interest to the customer with the easy to borrow stocks, although it is a trivial am mount - well I stand corrected.

I suppose brokers make more with margin loans to longs than they do from loaning shares to shorts. Bears do pay interest on many of the more popular shorts, and a lot of it (20-50%) for the stocks that making the headlines as the next Titanic.

Typically nearly every long/short stock trader that is fairly active will tell you that shorting is much more expensive than being long only, unless maybe they only trade only the big caps.
 
zdreg said:
the lender of the stock is fully collateralized because the proceeds from shorting the stock is credited to the account of the lender as collateral for lending the stock.
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Thank you for pointing that out. “Collateral for Customer Borrowing” has its own section in IB’s default activity report. I assume the collateral is part of the cash position specified under Net Asset Value.

I live in Europe. For one moment I worried that I would have to pay tax on the collateral, if the tax authorities would perceive the collateral as a USD position, which it is. That would imply paying tax twice when USD appreciates – the first time as part of the stock return and the second time as a consequence of the increasing value of the collateral. That would be catastrophic, because where I live FX gains are taxed at a markedly higher tax rate than the tax value of FX losses; unless your trading is taxed as a business.

However, I soon realized that even though the collateral is a USD asset, I also have a corresponding USD liability given that I have to pay back the collateral when the person borrowing the shares buys back the shares. The FX effect of the asset and the corresponding liability cancel each other out.
 
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