08.07.17 - A Snapshot of SNAP's Borrowing Costs

A recent article noted that, “It’s gotten so expensive to bet against shares of Snap Inc. SNAP 38.54 -2.56 -6.23% that the stock would have to keep dropping at least 5% every month just to recover the cost of financing those short positions.” [1]

Unfortunately for many equity traders, the market’s view of stock borrow cost is not readily available. An institutional market with limited transparency, stock borrow/loan trading rates are typically quoted on a rolling overnight basis, and third-party data sources are reported on a T+1 basis. Even for securities finance professionals, it is not easy to get information on future commitments of stock borrow since there are few term-borrow (e.g. 3-month) deals.

Hanweck uses market and reference data from the equity and equity option markets to create an alternative data set of stock borrow data called Hanweck Borrow Intensity Indicators. The Borrow Intensity Indicators are processed from real-time option data across the entire maturity spectrum of options, to form a composite view of market implied borrow rates for different time maturities. In essence, the data is crowd sourced, from a crowd that must make markets that accurately reflect real borrow costs (and future borrow risk) or else they would be arbitraged by other market participants.

Figure 1: SNAP Borrow Intensity Indicators

In the case of SNAP, the Borrow Intensity Term Indicators showed the stock at its most extreme hard-to-borrow levels in late June and early July of this year, with rates on the 45-day Indicator going past -60%.[2] The overnight market for SNAP stock borrow also reached some of its most extreme levels in this same time frame, but unlike the term markets shown here, the overnight market persisted in extreme hard-to-borrow levels of -50% to -60% anticipating difficult conditions until the lock-up period on stock freed up more collateral in the end of July. The Hanweck Borrow Intensity Indicators showed change in momentum of borrow levels, and for stock borrowers planning on staying short a longer period of time, the data reflected potential opportunities to borrow stock on term, either directly or synthetically using methods based upon option arbitrage strategies such as reverse-conversions.

Stock borrow rates offer additional value as a trading and risk indicator. It can be an important signal, if a stock not ordinarily hard-to-borrow suddenly becomes hard-to-borrow, or if the opposite occurs. The borrow market can also offer insights into the nature of certain prices in stock moves. For example, the borrow rates for Tesla ([stock symbol="TSLA"]) moved rapidly negative (more expensive to borrow) after the initial announcement on June 21, 2016 by Elon Musk that Tesla would bid for Solar City. The fact that many wished to short TSLA at this moment was hardly a secret. Many funds were outspoken on this, such as the author of the article, “Elon Musk Is the Reason I'm Shorting Tesla”.[3]  It was interesting nevertheless, to see the intensity of the borrow demand for TSLA shares as it revealed a gap between professionals selling stock they didn’t own, and the actual owners (true believers?) who evidently were in no rush to sell their holdings. The chart below shows the rapidly worsening hard-to-borrow conditions revealed by the options market for different terms of implied borrow.

Figure 2: TSLA Borrow Intensity Indicators

Hanweck Borrow Intensity Indicators offer advantages as a window of insight into the Stock Loan market:

> Based on transparent listed equity option market

> Available in real-time

> Visibility into term borrow expectations (e.g., 3 or 6 months) that can reveal market dislocations

1. Eisen, B. (2017, July 27). Betting Against Snap Has Gotten Incredibly Expensive. The Wall Street Journal. https://blogs.wsj.com/moneybeat/2017/07/27/betting-against-snap-has-gotten-incredibly-expensive/

2. Note that the convention for hard-to-borrow rates is negative since the borrower of the stock actually has to pay an interest rate to the lender of stock. This contrasts with normal borrow stocks where the borrower of the stock receives some interest back (a positive rate) for the cash collateral provided to the lender of the stock.

3.  June 22, 2016, thestreet.com,  https://www.thestreet.com/story/13616453/1/elon-musk-is-the-reason-i-m-shorting-tesla.html.

The stock was at its most extreme hard-to-borrow levels in late June and early July of this year.


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