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Synthetic Financing Trends

Robert Levy of Hanweck explores the use of a new metric for looking at broad aggregates of securities over the last two years.

Hanweck launched borrow intensity indicators  last year to provide intraday transparency into US stock borrow/loan rates and inform people of trading and lending opportunities. The model is based on the concept of constant maturity synthetic lending terms rates from 30 to 360 days. Borrow intensity is expressed in the format of lending rebate rates and can be readily incorporated into a company’s valuation framework. On a day-to-day basis, most users naturally focus on single securities that are exhibiting significant changes in term levels or are persistently hard to borrow (high intrinsic).

The focus here with the close of last year, is to explore the use of a new metric for looking at broad aggregates of securities over the last two years and to see if there are discernible patterns.

Analytic approach:

In previous research, we have examined trends of borrow intensity levels, counts of hard-to-borrow (HTB) securities of different ranges of intrinsic value and also categories of general collateral. Data is generated from the exchange-traded options markets and incorporates predictive analytics, rather than based on bilateral transactions. A relative measure is possible, with the help of underlying historical data in the option and equity markets. We used the data shown in table one to construct a synthetic fee measure for a given maturity of borrow intensity, in this case, 45 days. We then calculated a metric of dollar/ day at the 45-day rate, across the universe of HTB securities that ranged from mild to high intrinsic value, and further breaking this group into quintiles, with the first quintile holding extremely HTB securities. This synthetic fee measure gives a fairer and more representative view of trends in aggregates of securities across time rather than merely looking at rates. Unlike an average rate view, the fees are not thrown off by illiquid low volume securities that are extremely HTB.

Conversely, milder HTB securities that trade in high volume can contribute significantly to the total. The calculation of synthetic fee dollars is described below: Data for synthetic fee-dollar index Daily data aggregated from intraday measures across the entire US equity option universe (Hanweck Historical Option Analytic data):

Option expires that bracket target maturity

Trading volume of nearest-to-the-money strikes for each observation

Interpolated OIS rates as a term risk-free rate

Hanweck Borrow Intensity data

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