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In the opening theme of “Pawn Stars,” owner Rick Harrison says “You never know what is going to come through that door”. Think back to the first trading day of this year. What were your expectations? On the stock loan desk, it was business as usual. After a busy Q4 2019, we looked to the year ahead for optimization and customer experience projects. Of course, we were reminded of Rick’s words when the S&P 500 Index fell 34% in March.

Broad market declines drive a contraction in short balances because investors take profits by covering short positions. Sometimes old shorts are replaced by new shorts, but that was not the case in March. Short sellers who opt to stay short actually pay a lower dollar-per-share borrow fee. Borrow fee interest rates are charged on the collateral value, which is marked-to-market daily. So short position holders continued to pay the borrow fee but on a lower principal balance. However, it also became more expensive to short via another factor. In March the Fed Funds Effective rate dropped from 1.58% to under 0.10% and has stayed there.IBKR pays short credit interest to short holders according to this schedule. But with interest rates so low, traders are no longer accruing short credit or free credit interest.

The market bounced back, with the S&P 500 Index at all-time highs. So did short sale balances, buoyed by mark-to-market but also new opportunities. Our clients’ areas of focus are SPACs and IPOs.Post-merger SPACs have been especially volatile. Speculators express directional views but also attempt to derive profit from trades based on corporate actions. This drives up demand and borrow fees. The IPO market has been exceptionally strong in both issuance volume and performance. It does not seem to be slowing down heading into 2021. But not everyone believes the hype, judging by borrow fees. For US-listed IPO’s with at least $50M in deal size, the average daily borrow fee from listing date to present is 9%. That fee distribution is compressed more towards the immediate post-listing period. Biotechnology stocks pop up on our radar when there is news but unfortunately for prospective short-sellers, low share floats and shareholder concentration preclude widespread shorting. China ADRs continue to be active but have taken a back seat. We see counterparty borrow demand for equity products that track cryptocurrencies. Participants in IBKR’s Stock Yield Enhancement Program have had consistent utilization there. 

The IBKR stock loan desk wishes our clients a happy and safe New Year.