- The US securities lending market has grown considerably this year. An increase in average fees, due to strong demand for meme stocks, was a major driver of growth.
- GameStop stock is currently showing very high borrowing costs, indicating that there is a lot of short-term interest.
(Read more about Wall Street Memes: Here’s The Only “Not Bearish” Wall Street Analyst on GameStop Stock)
A bit of context
The securities lending market involves the lending of certain securities to institutional investors – typically banks and brokers. This practice requires the borrower to provide collateral in the form of cash or securities.
This process allows brokers and investors to participate in activities such as market making, short selling, etc.
According to the SEC, securities lending and borrowing is considered an integral part of overall market structures and helps many mutual funds and pension funds generate additional income.
Securities lending Latest data
EquiLend Data & Analytics recently provided a report on global securities lending activity during the third quarter. According to the company, in 2022 so far, the securities lending market generated $7.45 billion. This represents an increase of 8% year-on-year.
Drilling down into the third quarter, we see that securities lending generated $2.63 billion, representing a 12% year-over-year increase. Of that amount, about $1.3 billion – almost half – came from North American equities. That $1.3 billion equates to a solid 35% year-over-year increase; experts attribute this growth to an increase in average fees, which increased by 37% during the same period.
EquiLend’s report further highlights that several asset classes have played a key role in an increasingly volatile market. Recession concerns and pessimism about an environment of high inflation and high interest rates spurred increased short-selling activity.
The lending team at Brown Brothers Harriman & Co. (BBH), one of the largest private investment banks, has provided an overall market assessment for the second half of 2022.
They say that due to this year’s “untested and uncharted” macroeconomic environment, investors are looking to refocus on market fundamentals. Short selling, meanwhile, has increasingly been used as a hedge against market downturns, with fundamentally overvalued meme stocks a common target.
“This generated positive momentum creating depth in the hard-to-borrow market in the United States, including demand focused on ‘Meme Stocks’, such as AMC Entertainment and GameStop, which continued to attract attention and charge high fees.” – as assessed by the BBH securities lending team.
GameStop as Top Action Producer
Strong third-quarter securities lending revenue growth in North America was closely tied to growth in several key sectors, such as consumer discretionary, communication services and consumer staples.
Within consumer discretionary, which GameStop (EMG) – Get the GameStop Corporation report and Lucid Engines (LCID) – Get the report from Lucid Group Inc. are part of, experienced an 80% growth in their loan income. The former was the top funder, generating revenue totaling $102,591,665.
Note that this number corresponds to the fees collected by the intermediaries, not the total value of the shares loaned.
Within the communications and entertainment services industry, AMC Entertainment (CMA) – Get AMC Entertainment Holdings Inc. Class A Report. and SiriusXM (SIRI) – Get the report from Sirius XM Holdings Inc. saw its revenue increase by triple digits. It should also be noted that the consumer staples sector saw an astonishing increase of nearly 300% year-on-year, led by Beyond meat (BYND) – Get Beyond Meat Inc. Report.
GME Borrowing Cost
The cost of borrowing a stock varies according to the laws of supply and demand. Among the influencing factors are utilization (the number of shares available to sell short), liquidity and volatility.
Thus, it follows that high borrowing rates indicate strong demand to short a stock, and vice versa. Typically, average borrowing rates are between 0.3% and 3% per year.
However, if a particular stock is heavily shorted, it is not uncommon to see fees above 20% or much higher.
Currently, GameStop’s borrowing fee is 9.3% per annum. According to data provided by Interactive Brokers, GME’s borrowing costs hovered at this level for much of October.
At other times this year, GameStop’s borrowing fees have been much higher. Until early August, for example, borrowing rates for GameStop stock stood at an annualized percentage of 32.5%. At the end of May, for example, they soared to 110%.
High borrowing costs make it more expensive to short sell a stock and put additional pressure on short sellers. And even though GameStop’s current borrowing fees are lower than the sky-high levels seen earlier this year, a 9.3% annualized fee is still significant.
*Article updated Oct. 25 at 12:37 p.m. PST.
(Disclaimer: This is not investment advice. The author may own one or more stocks mentioned in this report. Additionally, the article may contain affiliate links. These partnerships do not do not influence editorial content. Please support the Wall Street Memes)
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