When investors buy a company’s share, conventionally, they hope for the stock value to climb and maybe pay dividends. But there’s another way to make money on your shares – lend them to other investors to use for their own purposes, for a fee. This hasn’t been previously possible for most investors in Luxembourg. With help of a fintech, one bank has committed to make it happen.
Swissquote Bank says it intends to democratise securities lending, explaining its thinking during last week’s Swissquote Investment Day event.
Sharegain is a fintech providing capital markets infrastructure solutions. Its founder and CEO, Boaz Yaari, is working closely with Swissquote to bring this option to investors below institutional grade.
Suspicion of fintech
Sparvell said that among traditional banks, “there was a lot of suspicion” when fintechs first came along. He said that the application of fintech by such banks has been limited to a few key areas, such as open banking, digital transformation, business process outsourcing like KYC and client onboarding.
“For us, we do all that internally, ourselves,” he said. “For us, it’s about finding expertise in fintech, the sort of expertise that we know we can’t turn on and we don’t have.”
Back in 2015, the fintech introduced a digital platform designed to democratise securities “by removing the logistical barriers and high cost of entry.” Its Securities Lending as a Service (SlaaS) platform, Sharegain says, offers end-to-end transaction support, «freeing online brokers, private banks and wealth managers to realize additional revenues from their existing assets.”
Ownership right
Stocks, bonds and exchange-traded funds are financial assets. But “like any other financial asset, like cash or real estate, we have the right to rent it out,” said Yaari. “It’s a basic ownership right.”
Yaari that any investment strategy depending on short selling a stock requires borrowing against it. He explained that it is today a 3,000 million dollar market, which until a few years ago was dominated by big financial institutions.
He explained why this hasn’t been possible for smaller-scale investors until now.
Never built
“Your bank or broker custodian never built this line of business,” he said. “it would have cost them 10s of millions of dollars and a few years go-to-market and that’s why you’re disadvantaged.”
Yaari explained that this “second stage of private investor participation in capital markets” is “levelling the playing field, giving you the benefit to enjoy some basic ownership rights.”
Swissquote CEO Dave Sparvell explained that his bank observed in about 2020, that there was “a possible opening to bring what was previously an institutional-only domain back into the retail world.»
Lending ETFs
The bank is putting a big push on selling exchange-traded funds (ETFs) to retail investors. “You can actually lend ETFs through Sharegain in the portfolio to borrowers,” he explained.
Sparvell said his first reaction to learning about this possibility was that it was “mind-boggling.”
“This is a whole suite of equities or whatever and they are lendable to the market and they pay very decent rates, a few percent annualised a year.” He said this would “lubricate the markets and keep them flowing.”
No free way
Share lending in the retail area has some less salubrious origins, he explained. It has been a common practice of very low-cost brokerages. “There’s no free way for somebody to offer you commission-free trading and actually make money.”
So these outfits hid their securities lending in their very small print, with no opt-out clause.
Swissquote’s model is by contrast, Sparvell underlined, “completely different, completely transparent.” Customers always have the right to opt out. The bank then shares the revenue with customers on a monthly basis.
Bad reputation
Short-selling has picked up a bad reputation in some circles. “The critique is that they ruin companies, drive shares down. Stuff is cheaper because of those evil short sellers,” said Harford. Another criticism is that it increases volatility, he said.
Yaari of Sharegain said that there is plenty of evidence proving these critiques are untrue. In terms of volatility, he said, securities lending actually decreases volatility because there’s always a sell-off. He explained that short sellers can only drive a share price temporarily.
He gave the example of Tesla, which “has been shorted for years, everybody doubted the electric vehicle.” Then Tesla started delivering strong, stable returns.
Very low risks
Yaari warned that share lending is not a way to get rich. “But from a risk perspective, very low risks that can deliver monthly income. “That is what investing is all about, maximising opportunities.”
He pointed to the history of financial institutions engaging in securities lending for decades. “
He said that this practice is all about counterparty risk, mentioning that Swissquote had chosen only to lend to Tier one global banks.