Saturday, 12 January 2019

Shorting and stock-lending

Via LinkedIn (sorry!) I came across this interesting paper from RD:IR on what's going on with regards to stock-lending in the UK. Definitely worth a quick read for anyone with an interest in this area.

A couple of headline - the overall level of lending of UK stocks decreased after the crash, but has been rising since 2015. However this is driven by lending of FTSE250 stocks rather than FTSE100. At least part of the explanation appears to be Brexit, with lending in the FTSE250 increasing significantly post June 2016 (and the FTSE250 being generally a better representation of "UK" companies).

Although the paper makes clear that not all lending is to facilitate shorting, nonetheless it's clear that is what the bulk of it is for. As such there is a snapshot of who is doing the shorting:
As at 20 November 2018, there were 609 disclosed short positions greater than 0.5%, totalling £13.4bn. The biggest “shorters” in UK Plc were Marshall Wace with £1.4bn, AQR Capital Management with £1.3bn, and BNP Paribas with £925m total shorts open and disclosed to the FCA. BlackRock, across its various global entities, held £896m in open short positions above 0.5%. 
This is based on FCA disclosures, which means the actual levels will be higher (because there will be a lot of short positions between 0 an 0.5% and some of them will be held by the big players). As noted in the previous example of Kier Group, the total shorts were more than double those disclosed in the FCA list, according to other data sources.

Also, as a comparison, here are the largest 20 UK shorts disclosed on the FCA list as of Friday.

Marshall Wace, AQR and Blackrock are all in there, though no BNP Paribas.

Another interesting point in the paper is the the interplay between quant funds and passive managers, and, in particular, the importance of the latter in facilitating lending:
One of the key reasons for the ability of passive investors to charge lower fees than active managers is the additional revenue stream of securities lending. This activity may seem contradictory to the classic view of investment, as you would invest into a certain sector/index via an EFT or index fund in the hope that your investment will increase in value. However, the fund manager or custodian for that fund may well at the same time be providing the market with shares from that fund’s portfolio to allow other investors to go short in that portfolio’s constituents. 
The rise in passive investing via index and quant funds is fuelling shorting and stocklending. Quant funds are a driving force in the activity, with algorithms automatically opening short positions because of the sheer size of the lending market. At the end of 2017 the global market of tradable assets stood at more than $20tn, with over 10% of this total being lent out. The European market alone generated revenues of $2.6tn. Expectations are that 2018 produced even higher figures and 2019 more so. Of course, it is not just passive investment managers that are providing the liquidity in the lending market, with active managers seeking additional returns to cover falling fees in the ultra-competitive asset management market.
Once again, my eye is drawn to Blackrock. They are both a major passive manager and a major player on the short side. If they want to short stocks they need to borrow them, so does the passive business lend to the bits of the business that go short, and if so do they charge the same rate they would do to other managers looking to short?

I keep returning to this, because something about all this makes me uneasy and I'm not quite sure what it is and why. Anyway, one for another day.

PS - I am pretty much convinced that the FCA should disclose all short positions that are reported to it. I appreciate this will make for a bigger list (and thus more admin). But 0.5%+ is a big hurdle.

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