Securities Lending

đź“Š Investing
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We’re considering taking the next step to make our unique zero-commission, zero-fee investing service even more sustainable.

A fairly common practice amongst brokers is to lend out the securities of their clients to other market participants who’d like to borrow them for short selling. For the clients lending the shares, the benefits may be slim to none, due to the extremely low borrow rates, but for the broker holding the bulk of shares, the pennies add up & can make the difference between losing money or being profitable.

We’ll be going down the same path with the help of Interactive Brokers, the world’s largest broker by the number of trades.

It’s crucial to point out that this will not affect your holdings in any way, shape, or form. Even if your shares happen to be lent out, which you will never notice as this is a 100% backend process, you will still be able to close, modify, add to the position.

This is because Interactive Brokers always hold a large enough pool of shares so that even during the most critical of times, they can always give you back your lent out shares, should you wish to close a position. That’s also why you won’t see them disappear, even if they’ve been lent out - you always have full access to them. The holdings cannot be lost, misplaced, or affected in any other negative way. In fact, most shares don’t even end up being lent out in the first place.

If you’re curious as to how the process actually works, let’s look at an example:

TSLA stock currently trades at $810 & due to whatever reason, you think the company is overvalued & decide to short it, betting that the stock would fall. Shorting means borrowing the stock from someone who owns it (John Doe) & selling it to the open market for $810. However, that $810 is not pure profit because you still need to give John Doe his share back at some point. Now, let’s consider that one week later, a single TSLA share has depreciated to $700. You’re happy with the $110 difference (profit) & decide to close the short position. So, you’d need to buy back 1 share at $700 from the open market & give it back to John Doe. Once that’s done, you pocket the $110 difference.

If you’d like to learn more about securities lending, feel free to check out these sources:

  1. https://www.investopedia.com/terms/s/securitieslending.asp
  2. https://en.wikipedia.org/wiki/Securities_lending
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If you open a limit sell order with a price much higher than the current bid/ask prices, will your shares be lended? Or does this prevent your shares to be available for lending?

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Seems fine to me and is common practice with some other brokers. If only us private investors could have the ability to short sell (without having to venture into CFDs).

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It is worth noting that not only do many other brokers already do this, but that it is also common practice amongst the major providers of ETFs. For example, Vanguard lends out shares that it owns in its VUSA S&P 500 ETF, partly enabling the low 0.07% fee. If I own VUSA then I am already indirectly participating in this aspect of market activity. Blackrock says thaf securities lending from IUSA ETF earns 0.01%. (BlackRock and Vanguard own about 8% of the world stock and bond universe.)

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@chantal They’ll still be eligible for lending.

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Yes, all major brokers have this practice but we wanted to properly inform the community.

The big news here is that thanks to the tremendous growth of our assets under administration, in 8 months our unique free share dealing services (Invest & ISA) will become profitable even without the introduction of any premiums services.

This estimation is based on our current run rate. It doesn’t account for any potential growth acceleration coming from AutoInvest, the addition of thousands of new stocks and many, many other features and improvements that are coming this year.

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@AlexK This is very nice to hear that in the future all types of accounts (CFD,Invest and ISA ) can create a stable form of revenue for your team. And also thank you for your transparency and the ability to share to us this type of information.

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will this feature be present in just the Invest account?

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Does this mean shorting will be available in the Invest account, or the securities lending is reserved for the participants in CFD accounts?

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Given the rise of commission free, this does seem like the best way forward for both T212 and clients. As someone else already mentioned the majority of ETFs do this already.

But would it be possible to get some official documentation on the risks and liabilities to T212s retail investor clients in your specific arrangement?

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Do you mean that there’s a competitive service that doesn’t do this? If we don’t do it, who will pay your bill for using our services completely free? This is a pure formality which will not affect our clients in any way and is not posing any risk whatsoever.

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Hi @AlexK, I think you may have misinterpreted me, or maybe I was not clear. If so apologies.

I think this is a good business model. It keeps barrier to entry low and keeps T212 Invest sustainable.

I was just asking when we would get some T&Cs detailing the specifics of the risks for your clients.

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We’ll publish it in a couple of days. You will see that nothing changes for you but it will be a major step for our sustainability.

Unlike other brokers, we are not planning to package essential investing/trading features into a paid subscription plan in order to generate revenue. We’ll keep adding features for free!

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Thanks for clarifying that @AlexK

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@David @AlexK I think this is a great step! But I have 2 questions:

  1. Will investors be paid interest on their lent out fully-paid securities? As my other brokers, pay a daily interest on lent out securities.

  2. Good to see you will allow short-selling - but, who’ll be short-selling? Investors on T212 or on IBKR?

I would like to be able to short as well on Invest/ISA, since with CFDs there’s, this type of shorting is not applicable.

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  1. We won’t pay the interest to the investors - this will be a revenue source for us. It’s a very small percentage but the total will be meaningful for us. The benefit for the investors is that our service is completely free, unlike any other investing service in the UK and Europe.

  2. We are not planning the introduce short selling in Invest and ISA this year.

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I hope all is well - because certainly I’m kind of getting the feeling that T212 is not profitable. I remember T212 team mentioning the company is profitable since 15+ years?

Now with millions of users (and more on the way), you should be even more profitable.

BTW I do NOT mean this in a bad way, I’m an entrepreneur and understand companies need to make money, and honestly this Security Lendings is a good and decent way for you to make money, I’m all up for it! :muscle:

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Thanks for the swift answer! Great initiative and thanks for being transparent about this with the community beforehand! Super kudos :muscle:

As for the interest, I and most other retail investors won’t mind not getting it (unless they have a big portfolio) as long as we are getting an amazing service, customer support and latest features with all the bells and whistles for free!

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when will short selling be available?

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We do not know what deal T212 has negotiated with IB. Hopefully is it favourable. But as a guide, we can read the FAQ pages of Interactive Brokers, where explain their Stock Yield Enhancement Program “In general, IBKR pays interest to participants on their cash collateral at a rate that approximates 50% of the amounts earned by IBKR for lending the shares. Assume IBKR earns 15% annualized income from lending shares with a value of $10,000 and it posts $10,000 cash collateral to a participant’s account. The normal daily interest rate IB would pay to a participant on the cash collateral would be $2.08”.

That looks to be daily interest amounting to about 7.5% annualised. I believe stock borrow rates can be less or more than 15%. Shares of a company that is heavily shorted, such as AMC Entertainment, at present, will be more expensive to borrow.

But of course not all shares are going to be lent out at all times. So earnings depend on the amount of short interest. I would expect the actual earnings for T212 will be much less as a % of AUM. Another data point is that Blackrock reports earning 0.01% on lending out shares in IUSA and ISF ETFs.

I found this article interesting to read on the subject.