“Nominal” versus “real” short borrow fee rates

[Maverick2608]

https://www.interactivebrokers.com/en/index.php?f=1595&p=calculations

https://www.interactivebrokers.com/en/index.php?f=1595&p=secfinancing

Example
Hard to borrow stock with “nominal” short borrow fee rate of 500%

Stock price: 3.93
Collateral mark: 3.93 x 1.02 = 4.009 rounded up to nearest 1.00 = 5.00
Short fee rate per day: 500%/360 = 1.39%
Short fee cash amount per day: 1.39% x 5 = 0.06944

“Real” short borrow fee rate: 0.06944/3.93 = 1.77% or 1.77% x 360 = 636%

Why not just quote the real short borrow fee rate of 636% instead of 500%?

This is also somewhat unsettling:
"*TWS Fee rates are indicative intraday and may change due to market conditions between trade execution and settlement."

In my opinion IB generally is fair. So I assume this is normal practice across brokers?

 

[zdreg]

Collateral mark: 3.93 x 1.02 = 4.009 rounded up to nearest 1.00 = 5.00

why do you round it up to the nearest 1.00?

 

[Maverick2608]

why do you round it up to the nearest 1.00?

From IB link 1 above:
"For example, the collateral balance on a USD-denominated security would be:

Collateral Balance = (stock A prior day closing price x 102%, rounded up to the nearest 1.00) x (number of shares stock A) + (stock B prior day closing price x 102%, rounded up) x (number of shares stock B)"

IB then applies this in to the two examples of AAPL and SNAP in the IB link 2 above, where the share prices of AAPL = 147.01 and SNAP = 17.55 are both multiplied by 102% and rounded up to the nearest 1.00 which results in collateral marks of 150 and 18.

If you with "why" mean what is the purpose, then I have no answer other than "to earn more money in a less transparent way." I assume this practice applies to all brokers. I find it hard to believe that this has been invented by IB.

IB lays it out in concrete examples in the links above. But other brokers do not. If a broker does not state it anywhere, are they thereby breaking any rules on transparency?

 

[SteveM]

off-topic question: why not just get long stocks with exorbitantly high shorting fee rates and lend out the shares and collect the vig?

Even if half the companies go bankrupt on you, you should still should make very good money spread out over many bets, no?

 

[elt894]

So I assume this is normal practice across brokers?

In the terms of the Stock Yield Enhancement program, they describe it as standard practice across the industry:

The current industry convention for the collateral calculation for U.S. stocks is to multiply the rounded security price times the number of shares by 102%...IB reserves the right to adjust to U.S. industry convention should that change.

off-topic question: why not just get long stocks with exorbitantly high shorting fee rates and lend out the shares and collect the vig?

Even if half the companies go bankrupt on you, you should still should make very good money spread out over many bets, no?

I never did this as a serious strategy, but I used to allocate some play money to it. One challenge is that you can't guarantee the shares will be lent out, and some stocks seem to be more consistently lent out than others. Also, if the price drops that usually relieves the short pressure, so you have a mark to market loss and you don't get income from lending the shares.
The trick is to find stocks that should be somewhat stable and are consistently lent out, and there aren't enough candidates to get good diversification, at least for my risk tolerance. TRX was a fun one. It's a relatively legitimate company as far as penny stocks go, was yielding 200% after IB's cut, and shares were almost always lent out. I sold it when it had a spike that as best as I could tell was due to people confusing it with the TRX cryptocurrency.

 

[Maverick2608]

I never did this as a serious strategy, but I used to allocate some play money to it. One challenge is that you can't guarantee the shares will be lent out, and some stocks seem to be more consistently lent out than others. Also, if the price drops that usually relieves the short pressure, so you have a mark to market loss and you don't get income from lending the shares.
The trick is to find stocks that should be somewhat stable and are consistently lent out, and there aren't enough candidates to get good diversification, at least for my risk tolerance. TRX was a fun one. It's a relatively legitimate company as far as penny stocks go, was yielding 200% after IB's cut, and shares were almost always lent out. I sold it when it had a spike that as best as I could tell was due to people confusing it with the TRX cryptocurrency.

I will almost guarantee that if applied across the board, it would not work, since IB takes half the cut. (I believe that is actually pretty generous as most brokers do not let retail clients share any of the revenue?) The market is not that inefficient.

If you buy options instead, you will take in the full cut. That might have worked, if the stocks had liquid options. But generally they do not. Not enough to achieve adequate diversification.

So I agree, in order for it to work, you need to cherry pick, and that implies - as everything else in this world that generates income - hard work.