Chapter 70. Mechanics of the Equity Lending Market

JEFF COHEN

Securities Lending Manager, Susquehanna Intl Group, LLLP

DAVID HAUSHALTER, PhD

Corporate Research and Educational Associate, Susquehanna Intl Group, LLLP

ADAM V. REED, PhD

Assistant Professor of Finance, University of North Carolina at Chapel Hill

Abstract: Short selling involves a transaction outside the stock market; short sellers borrow stock for delivery to buyers. The equity lending market allows short sellers and other market participants to borrow shares from stock owners for a price. Supply and demand factors determine each loan's price. Since supply of shares is usually high, most loans have low prices. However, episodic events can lead to significantly higher prices. Although there are risks for borrowers and lenders in the equity loan market, cash collateral allows the risk for lenders to be minimized.

Keywords: equity loans, securities lending, short sales, delivery, settlement, rebate rate, specialness, delivery failure

Short sellers sell stock they do not own. The equity lending market exists to match these short sellers with owners of the stock willing to lend their shares for a fee. Despite its obvious importance to the operation of financial markets, the equity lending market is arcane. The market is dominated by loans negotiated over the phone between borrowers and lenders. Although there have been significant improvements in recent years, there is no widely used electronic quote or trade network in the equity ...

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