House Majority Leader: Pay owner of stock to borrow his/her shares to short sell.

Discussion in 'Wall St. News' started by seasideheights, Oct 20, 2009.

  1. another idiot who has no idea how the market functions.

    this is getting really old, all these politicians who have never traded a stock are all of a sudden, experts.

  2. Customers of all sizes can in fact participate synthetically in the lucrative Stock Loan/borrow process without ceding the payments to their brokerage.

    Exchange Future for Physical (EFP) is a two legged transaction whereby the stock position is sold and the related Single Stock Future is simultaneously purchased. In hard-to-borrow names the SSF will be priced LOWER than the stock. This negative basis is in fact the profit in the 'lend'.

    Congress is right to push the issue. Pension fund customers incurred large losses from the process while the brokerage firms all made out quite nicely.

    Then the pension fund customers had to provide funds to support those very brokerages from collapse.

    The customers paid twice and they really did not have to.

  3. thank you , Sir. Josh Galpin did a lot of work on this several years ago. Yes, by naked shorting, you circumvent the process, and the Pensions do suffer an economic loss. Good to hear a sane voice who indeed does understand how the markets work.

    We straighten this out now, or lose it.
  4. Brokers can only lend your shares if you have borrowed money from them. And they can only lend out shares pledged as collateral.

    So it is not like Joe the Plumber who has 500K in fully paid securities is getting his portfolio loaned out for free.

    You get a lower Margin interest in return for pledging securities as collateral during the process of borrowing on margin.

    Politicians are totally clueless.

    "The measure would require brokers to alert investors that they may lose voting rights if their shares are loaned to short- sellers on the date of a corporate election, according to the summary."

    LOL, This is already notified to customers who borrow on margin and what happens to re hypothecated shares pledged as collateral.

    Read the Margin agreement form. When you borrow money and put something up for collateral, technically you no longer own it during that time until you pay your margin debit off and collateral is returned to the customer control area.

    If Politicians keep it up, 20% margin interest rates :)
  5. With all of these new regulations Congress is proposing, the stack of books needed to explain how to trade legally could soon look like the tax code.
  6. My friend, you have some surprises on the horizon. It is supposed to work like that. "supposed " is the operative word.

    They do nothing w/i the law except talk about it.
  7. piezoe


    I am glad that politicians are taking a look at this, finally! It is supposed to work the way Kingofshorts has outlined, unfortunately there has been zero enforcement. ZERO!
  8. So you are telling me Brokers are violating en masse 15c3-3 SEC regulations and if customers look in the box for fully paid securities they will find nothing?

    All this shit gets audited.
  9. Kingofshorts is correct. Brokerages cannot lend out fully paid for securities. They generally don't. However Pension Funds do and they get very little in return for the loan while taking on considerable risk and it doesn't have to be.

    Let's ignore the Pension Funds for now and focus on the retail customer.

    Let's consider a margin account where the customer borrows the maximum of 50% of the value of Sears Holding (SHLD) trading today at roughly $70. Lets use a round number of 1000 shares.

    Customer borrows 35K at 3.5% which is 1225/yr and 102/mth in interest charges. That is the real cost of trading...not 9.95/trade.

    Because he bought on margin the brokerage firm can loan 1/2 the shares out. Today SHLD was being lent at 28% annually. 35K x .28 = $8750/yr or 729/mth. So they make on the interest on the loan AND on loaning the stock out.

    So the math works out that by just buying 35K worth without borrowing the customer SAVEs the 102/mth in margin cost and could lend the stock synthetically to capture the 729/mth instead of ceding that to the brokerage.

    Buying on Margin and allowing the brokerage to lend it out also exposes the customer to a couple of risks. First any dividends paid are actually received as 'dividends in Lieu' which are taxed at the higher ordinary income rate and not as dividends. This is a significant difference.
    Additionally positions that are out on loan may not be covered by SIPC coverage. Given that brokerages have shown they can fail this is very troubling.

    What everyone should understand is Sec Lending is an important part of the profit center at brokerages. That is how the brokerages make money. Customers can't loan their own stocks the traditional way but they can using the EFP and Single Stock Futures.

    #10     Oct 20, 2009