Securities lending is one of the widely misunderstood concepts in the investment community, and securities lending shows up intermittently in the news for both positive and negative reasons. However, this complex trading pattern driven by short selling can drive down costs for the investors. In today’s episode, Grant dives deep into how securities lending works, the different parties involved in it and their roles, how investors participate in securities lending, and how it impacts the performance and costs of ETFs and mutual funds.

 

 

Show Notes

[02:40] Understanding Securities Lending – Grant starts with explaining how it works, how it relates to investment funds that many people put their money in, and how it generates revenue for brokerage firms.

[07:13] Trading Settlement – The process of trading securities is a bit more complex than it looks from the outside. Grant walks our listeners through how trade settlements work.

[12:50] Short-Squeeze – How unexpected fluctuations in stock price can cause investors to lose money in certain scenarios.

[13:47] Driven by Short Selling – Grant reviews how transactions between several parties create a complex ecosystem that facilitates short selling.

[16:23] Supply and Demand – How brokerage firms can make money through securities lending depending on the demand for shares.

[19:10] Sources of Supply – Grant explains the sources brokerage firms use to get the securities they lend to other parties and how investors can make money in some scenarios.

[21:40] ETFs and Mutual Funds – How ETFs and mutual funds are involved as another source of supply and how it benefits investors by reducing expenses.

[27:20] Facilitating Short Selling – A common argument is that you may not want your shares to be lent out because you don’t want to facilitate short selling in a company that you own. Grant shares his take on the relevance of this idea.

 

Resources

Check out My Take On Short Selling: www.abovethecanopy.us/my-take-on-short-selling/