Short interest rates at IB

[stock777]

Does anyone know exactly what the short rebate rates mean as reported by IB.


Stock A

Rate (- 5.5 %)



Stock B

Rate (+ 1.5 %)


What exactly does this mean and since they dont pay anything unless you are short over 100k, how does this affect smaller short positions?

I see some stocks with huge negative rates, presumably these are costly to borrow.

 

[dont]

How do you see the rates?

 

[stock777]

so not one of you twits knows the answer to this simple question?

 

[OneChicago]

Ok let me take a stab at it.
There are two types of stocks in the stock loan world. General Collateral (GC names) and Specials (hard to borrows.

In General Collateral names you have to post 102% of the value of the stock to borrow it. That collateral is reinvested and the brokerage will pay you a percentage of the invested returns. If the number is ZERO then you are basically loaning your brokerage money and they invest it over night. I have explained in other places how this is the way brokerages make money.

In the Special names the 'rebate'.....the percentage of the invested returns that are payed to you....often goes to zero naturally and in the really hard to borrow names the borrower must PAY a commission in order to borrow. Hence the negative rebate rate.

Best

 

[mskl]

Quote from OneChicago:

Ok let me take a stab at it.
There are two types of stocks in the stock loan world. General Collateral (GC names) and Specials (hard to borrows.

In General Collateral names you have to post 102% of the value of the stock to borrow it. That collateral is reinvested and the brokerage will pay you a percentage of the invested returns. If the number is ZERO then you are basically loaning your brokerage money and they invest it over night. I have explained in other places how this is the way brokerages make money.

In the Special names the 'rebate'.....the percentage of the invested returns that are payed to you....often goes to zero naturally and in the really hard to borrow names the borrower must PAY a commission in order to borrow. Hence the negative rebate rate.

Best

that is correct.

Mr. Downey: I remember when you use to work for this particular Brokerage firm....

Here is some advice for you folks at OneChicago. You should list every one of these "hard to borrow" names on your Exchange. Not only should they be listed but a tight continuous market should be posted - and you will get lots of business.....

This is how you can take business away from Equity exchanges as many of us can't sell these hard to borrow names.

You also might want to consider expanding your trading hours to the pre and post market...

 

[OneChicago]

Our plan is to list more of the hard to borrow names but there is a problem. Marketmakers are subject to the same locate process as everyone else (more or less) and are therefore reluctant to expose themselves to risk. We have minimum bid/ask requirements for the marketmakers and given the volatility in the rebate rates for the Specials they aren't too motivated to be making tight markets because it is so difficult to quantify the risk.

But it is not a dead issue. The Stock Loan process is one of the murkiest on Wall Street and is dominated by the large Prime Brokers. As I have mentioned in other posts it is always the head of Stock Lending who has the up/down vote on whether the firm will allow customers to trade SSF. Can to guess where they stand? Now they sometimes have the stocks in their inventory but often times they have to go to the pension and endowment funds who are by nature big, diverse buyers of stock. They 'borrow' from the pension funds (which are supposed to be acting as fiduciaries for the pension investors) and pay 20-50 basis points in return but then turn around and charge 60 to 7500 basis points to the customers. It really is outrageous. So from my point of view the pension funds should be bringing their inventory to the market to facilitate short sellers but they want no counterparty exposure, transparency and a centralized location. This is exactly what OneChicago offers but if they begin to do this who do you think will benefit and who do you think will begin to suffer? So who has an incentive to keep customers and pensions from meeting in the middle?

What we are attempting to do is change market structure. That, I am afraid, is going to take a bit of time.

Best

 

[mskl]

Quote from OneChicago:

Our plan is to list more of the hard to borrow names but there is a problem. Marketmakers are subject to the same locate process as everyone else (more or less) and are therefore reluctant to expose themselves to risk. We have minimum bid/ask requirements for the marketmakers and given the volatility in the rebate rates for the Specials they aren't too motivated to be making tight markets because it is so difficult to quantify the risk.

But it is not a dead issue. The Stock Loan process is one of the murkiest on Wall Street and is dominated by the large Prime Brokers. As I have mentioned in other posts it is always the head of Stock Lending who has the up/down vote on whether the firm will allow customers to trade SSF. Can to guess where they stand? Now they sometimes have the stocks in their inventory but often times they have to go to the pension and endowment funds who are by nature big, diverse buyers of stock. They 'borrow' from the pension funds (which are supposed to be acting as fiduciaries for the pension investors) and pay 20-50 basis points in return but then turn around and charge 60 to 7500 basis points to the customers. It really is outrageous. So from my point of view the pension funds should be bringing their inventory to the market to facilitate short sellers but they want no counterparty exposure, transparency and a centralized location. This is exactly what OneChicago offers but if they begin to do this who do you think will benefit and who do you think will begin to suffer? So who has an incentive to keep customers and pensions from meeting in the middle?

What we are attempting to do is change market structure. That, I am afraid, is going to take a bit of time.

Best

I understand what you are saying. But keep in mind that option market makers in those same hard to borrow names will post markets - markets that take into account the fact that it may be difficult to hedge (i.e synthetics generally trade at cheaper levels relative to the stock to account for the huge borrowing costs)

Having said this - let's say you have a hard to borrow name (XYZ) and if your market makers were to post markets at some sort of discount to Fair Value (based on borrowing factors) - Then at least investors could short the stock in an easy format (without using equity options and without the risk of being bought in) and anyone who wants to buy that stock should buy the SSF instead of the equity because it will trade at a cheaper price (FV). Delivery is an issue - yes - but you could also settle the SSF's to cash. Bottom line is as you say you have to attempt to bring the buyers and sellers together and reduce that huge markup in borrowing rates. The first step would be to have market makers post markets in these types of issues - and when things trade at a discount - then the buyers should come in. Yes it will take time but it seems to me there is something there for you guys - an advantage over the equity market. Best of Luck.

 

[freehouse]

Quote from mskl:

I understand what you are saying. But keep in mind that option market makers in those same hard to borrow names will post markets - markets that take into account the fact that it may be difficult to hedge (i.e synthetics generally trade at cheaper levels relative to the stock to account for the huge borrowing costs)

Having said this - let's say you have a hard to borrow name (XYZ) and if your market makers were to post markets at some sort of discount to Fair Value (based on borrowing factors) - Then at least investors could short the stock in an easy format (without using equity options and without the risk of being bought in) and anyone who wants to buy that stock should buy the SSF instead of the equity because it will trade at a cheaper price (FV). Delivery is an issue - yes - but you could also settle the SSF's to cash. Bottom line is as you say you have to attempt to bring the buyers and sellers together and reduce that huge markup in borrowing rates. The first step would be to have market makers post markets in these types of issues - and when things trade at a discount - then the buyers should come in. Yes it will take time but it seems to me there is something there for you guys - an advantage over the equity market. Best of Luck.

I cannot see SSFs (in individual names) settle in cash. Changing delivery will mess up all the people who are using using them as exchange for delivery vehicles (interest rate vehicles). Plus you are going to need a rule change. Unlikely.

 

[mskl]

Quote from freehouse:

I cannot see SSFs (in individual names) settle in cash. Changing delivery will mess up all the people who are using using them as exchange for delivery vehicles (interest rate vehicles). Plus you are going to need a rule change. Unlikely.

Off the top of my head - I believe that I have seen some that settle in cash but those might be European....

 

[OneChicago]

Aside from our Narrow Based Indices which are settled in cash all other SSF do in fact settle into long or short CUSIP positions. This is a feature and not a bug.

EUREX does in fact offer SSF trading settling in cash but we have no plans to adapt our contracts.

Best