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What are the risks involved with lending out your TSLA shares?

Discussion in 'TSLA Investor Discussions' started by DaveT, Oct 1, 2016.

  1. DaveT

    DaveT Searcher of green pastures

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    I'd like to hear what the risks are in lending out shares (i.e., for others to engage short selling). If anybody has some real and extensive knowledge on this topic, would love to hear from you.

    More specificially, is there any chance of losing your shares if you lend them out? If so, in what scenarios would you lose your shares? Also are there any other scenarios where it wouldn't be advantageous to lend it shares?

    Also is lending out shares the same risk across all institutions? Meaning, does lending out my shares via my Fidelity account carry the exact same risk as it does lending out my shares via an IB (or other) account?
     
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  2. Akikiki

    Akikiki A'-Lo-HA ! y'all

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    Good question DaveT. I also would like to learn more about this. Will be looking forward to the experts explain it. Thanks
     
  3. adiggs

    adiggs Active Member

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    Ooh - fun question! I'm looking forward to hearing what others have to say. I do have real experience, as in I'm lending my shares out, and I've been reading and learning about the process. I wouldn't say it's extensive or I'm an authority - this is 2 months now I've been participating.

    There are 4 parties involved in the lending of shares. I will call them the share lender, their brokerage, the share borrower (who is selling the shares they borrow), and an escrow bank that holds collateral (for a fully paid lending program). In reality, I suspect that brokerages loan shares to each other, so that an IB customer can borrow shares from a Fidelity customer. For my purposes, the IB-Fidelity (for example) lending of shares is ignored.

    As the share owner, my counter party is my brokerage, to whom I lend my shares to. The risk I am taking on is that my brokerage will be unable to return my shares on demand (or my sale of the shares). Strictly speaking, the way I understand it, I am not taking on direct risk that the person establishing the short position will be unable to perform - the brokerage is taking on that risk. Indirectly of course, I have that risk.


    Performance means that the brokerage returns my shares to me when I stop lending them out (it's a demand loan, and I can call it anytime I care to). The brokerage returns shares to me - they don't need to be "my" shares, and I believe typically, that's exactly what happens. The brokerage has some big or small pool of shares, so the easy answer if I demand my shares back is to get them from the pool they have.


    The real risk in the system is being managed by the brokerage. They lend out the shares they borrow, and charge the borrower of the shares an interest rate. The brokerage also collects cash collateral equal to the value of the shares lent out, and deposits that collateral with the escrow bank (4th party). That collateral is in the name of the share lender, and is there for the specific circumstance in which the brokerage CAN NOT acquire the shares demanded and return them. This is a default on the demand loan by the brokerage, and of course they want to avoid defaulting in the worst way (it looks a lot like a need for bankruptcy protection). The collateral held by the escrow bank is equal to the value of the shares at the close of market yesterday (last trading day), thus limiting the share lender's risk to selling their shares at yesterday's closing price (leading to tax consequences, and other possible consequences associated with selling one's shares when you didn't want to).

    To help the brokerage from defaulting, the brokerage has immense powers over the share borrower's account (margin account - read your margin account agreement closely to see all that can be done on your behalf to respond to a margin call). The brokerage also establishes the solvency of the share borrower by keeping collateral in escrow equal to what's been borrowed (at least for TSLA).


    You asked about risk across institutions. My impression from reading IB and Fidelity documentation, is that IB is less of a risk based solely on their processes and procedures. It is also my belief that it's not a big difference. In particular, I get the impression that IB is aggressive in their margin calls related to TSLA (or any hard to borrow shares) borrowed shares, with margin calls happening midday and being acted on immediately. As a share lender, I would want my counter party to be aggressive about maintaining adequate collateral, and not allowing a position to get too far out of balance. I'm thinking of a BIG move up in the stock within a single day.

    My impression of Fidelity is they're more of a daily update outfit. Both are equal, if my view is accurate, in a flattish or steadily changing market. But if we get into a world where a 6% move up in a day is a disappointingly small move (think TSLA's big run from 30 to 190), then that could be a problem. Then again, Fidelity isn't going to risk their whole enterprise because a short is out of balance and let anybody get too far behind.

    Back to risk, I figure that in the worst case, if Fidelity / IB aren't risking their own solvency by doing so, they will use their own funds to find shares and return them before returning collateral (probably including using the collateral first, and then their own company funds), in order to avoid a default to a share lender. That's completely a guess on my part, but I believe it represents good business considering their business is trust - trust on the part of the people who's money and securities they hold, that they will get them back on demand.


    Really, this is all the result of my own reading, and then putting this together into a mental structure that is consistent with what I've read, witnessed, and that makes logical sense to me. I can be wrong in important ways about details and big stuff, and I'm looking forward to getting other perspectives.


    My net result - I view my lent out shares, at the scale I'm operating at, to be as safe as lending money to Fidelity. Again at my scale, I know that's riskier than lending money to the US Government, but the difference is small enough that they round off to the same thing. That doesn't mean that I'm right - only that it's how I view it.

    If I were a share holder in the millions of shares and lending them out, then I would consider lending shares to be dramatically more risky than lending money to the US Govt. But that's because at 1.5M shares, I'd be lending out 1% of the company, and that's a lot of company ownership to find on short notice if required. I'm more like .0001% of the company, and that's not enough shares to move the share price noticeably in a 5 minute trading window.

    My risk is the great meltup happening all within a single trading day, enough shorts receive margin calls during that meltup day that can't be met, and Fidelity can only satisfy my loan using the collateral. As long as the meltup happens over weeks instead of days, I think I'm fine.
     
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  4. adiggs

    adiggs Active Member

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    This reminds me of a related thought I've had about shorting a company, and a different way of thinking about the activity. Using round numbers of TSLA, there are around 150M shares of the company in circulation, with between 25 and 30M shorted. I'll use 25M short to make the math simple and to illustrate the idea I have in mind here.

    The act of borrowing those 25M shares and selling them into the market, is sort of like 25M new shares have been sold into the market. There are now 175M shares owned and being directly affected by movements in the stock price.

    So another way to think about it - there are 150M net shares of TSLA owned, but there is demand today for 175M shares of TSLA at $205/share (as in, there are beneficial owners of 175M shares of TSLA, even if only 150M of them get to vote). TSLA is one of the most shorted companies there is - that is an extra 1/6th of company beneficial ownership that's been manufactured as a side effect of the shorting activity. Selling an extra 1/6th of the company creates a powerful short term dilution and drag on the share price (and we see that in the daily posts and interpretations from @Papafox and others).

    That's also a programmed 1/7th removal of shares from circulation (buy to close). Or back to numbers, how much does the share price go up, if the 175M beneficial owners of the company needs to be shrunk to 150M to find seats for everybody?

    If TSLA has very few shares short, then maybe I'd consider getting involved. One powerful reason to not short the company, in my opinion, is that the trade looks to me like it's got too many people in it. There are so many people in it, they're going to create their own worst outcome. (Or so it looks to me).


    Anyway - it turns out I can convey roughly everything I know about shorting, from the share lender and long TSLA point of view, in a few minutes and 2 posts to an Internet forum. Don't trade on the basis of anything I've written here :)
     
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  5. TrendTrader007

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    Thanks for the very detailed and lucid explanation
    Does fidelity credit your account with interest payment on a monthly basis? Like say 1st of every month thanks!
     
  6. TrendTrader007

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    Interest rate went down to 8% from 10% a couple days ago and down from 14.5% a week ago in Fidelity. I'm hoping that when the SP goes up then the interest I receive on a daily basis will go up accordingly. I'm still making good daily interest income so I'm not complaining but it sure would be nice to make the shorts pay even more
    When I talked to Fidelity Lending department they were pretty clear that collateral is 101% of market values of securities lent out and is marked to market on a daily basis
    I hold over 0.00014667% of TSLA and have lent out about 77% of those shares because the rest are on margin. Over the next several days I hope to make a killing not only on collecting interest payment but on the stock price as well. We'll see
    I do really appreciate your thoughtful insights
    Keep up the great work!
     
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  7. MikeC

    MikeC Active Member

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    Interest payments are usually available by the 4th or 5th of each month, in my experience.
     
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  8. TrendTrader007

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    Thanks!
     
  9. Topher

    Topher Energy Curmudgeon

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    A different kind of risk, is that by loaning your shares you are enabling short selling. Thus the presence of people who will be motivated to have Tesla fail. And therefore might do things to help that failure along, such as write false stories about Tesla autopilot, or invent false complaints about suspensions of Tesla cars. Those things might actually change the probability of Tesla actually failing.

    Thank you kindly.
     
  10. fbitz777

    fbitz777 Member

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    if you are worried about downside you could write covered calls on the shares before you start lending them. I have done that many times at Fidelity but that requires margin account.
     
  11. Topher

    Topher Energy Curmudgeon

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    How is that different? How does it reduce the incentive for shorts to malign Tesla?

    Thank you kindly.
     
  12. electricity

    electricity Member

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    I agree with you, I don't want to partipicipate or be a part of short scam artists by lending them my shares to short.
     
  13. neroden

    neroden Happy Model S Owner

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    Fidelity allows you to lend shares which have covered calls written against them? Schwab doesn't. (You'd have to write *uncovered* calls with the margin requirements applicable to them.)
     
  14. adiggs

    adiggs Active Member

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    Yes. I'm due for my second monthly credit any day now. There is also a statement that arrives with the daily interest earned around the 7th of the month.
     
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  15. adiggs

    adiggs Active Member

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    Not that I know of, but I haven't asked. That wouldn't seem likely to me, as you'd be using the shares you own to back two different activities - the covered call AND the loan of the shares.

    For the incremental risk of failure due to providing ammunition to the shorts observation... I guess it depends on how much weight you give to the idea that people saying bad things about TSLA increases the likelihood of company failure. I see it as meaningful in the short term - clearly it carries short term weight on the share price - and irrelevant in the long term. I'm strictly long, and long term, so the one corner case that arises is if TSLA needs to raise capital via selling shares, and the shorts have those shares artificially prices cheaply at that moment, then TSLA will get less money.

    I rate that risk as very small, but reasonable people can differ.


    The bigger risk I see in the market, is that the shares short looks like a spring valued at $5B or so (25M shares @ $200/share). That's a gargantuan short position in the aggregate, and that's $5B of buying that has to be performed sooner or later. If this were Apple, that'd be noise. For a company around $30B valuation, that's a gargantuan amount of buying that MUST take place (outside of bankruptcy).
     
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  16. Alketi

    Alketi Member

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    For those who are LONG at Fidelity and lending shares and receiving interest in return -- did Fidelity contact you with the offer, or did you contact Fidelity?
     
  17. fbitz777

    fbitz777 Member

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    In my case I have am long (all with covered calls) on multiple stocks. I guess I have standing instructions to allow lending my shares and they NEVER contact me with offers; they just do it and if I need the shares I call them to cancel.

    However they usually do this for stocks that are hard to borrow (HTB)...I see TSLA now at 15.25% rate.
     
  18. AlMc

    AlMc 'Senior Moments' member

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    Very interesting discussion and info. For those with the most experience do you find one brokerage house better than another. All my TSLA is in TD and they don't lend out shares IIRC.
     
  19. TrendTrader007

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    Thanks!
     
  20. TrendTrader007

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    Not true! With my current TSLA position I'm easily earning as much interest per annum as would take me to buy well over $1000 shares of TSLA in a year ( last week it was like 2000 shares and tomorrow will be a different story, hopefully) this way I'm giving shorts more rope to hang themselves with plus I bought an extra 2000 shares of TSLA at $208 or so that I would not have bought otherwise
    So the bottomline I'll make money on shorts paying me interest through their nose plus I'm buying even more TSLA stock to bet against these morons
     
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