Guardians of the Short vol. 2023

The securities lending market frequently presents special situations which traders in Greenwich, Zug and Hong Kong manage.  Many of them are in stocks where the catalyst is a corporate action.  The collective experience of the individuals handling these trades, IBKR’s counterparty relationships, policies and procedures enable us to support new shorts and keep existing shorts in the trade, providing a seamless experience for clients taking on risk.  Some popular names for our clients were AMC (unsurprising), Johnson & Johnson (JNJ) and VMWare (VMW).  Arbitrageurs such as hedge funds and proprietary trading groups took advantage of IBKR’s deep availability pool.  The most important part of taking a position in a corporate action name is deal analysis.  Is there enough spread?  What is the likelihood of the deal closing?  What are the actual distributions of the action?  The answers are subjective.  And the final P&L depends heavily on trade entry timing and the broker’s short stability.

Financial markets confront traders with at least one major macro event each year.  Last year it was the sudden rise in interest rates (which the futures markets continually mispriced).  The declining values of bonds on some banks’ books contributed to the regional banking crisis in 2023.  When a sector is in turmoil, it’s all-hands-on-deck on Wall Street.  Conditions which affect a large group of stocks include more complexity than those involving a single issuer, such as Wework Inc. (WEWKQ).  It takes more time to dive into the details of EDGAR filings, review announcements and monitor the various markets (cash, lending, derivatives) for multiple stocks.  The uncertainty around actions that the government and central clearing counterparties will take (such as backstops and options processing) adds to volatility.  Short sellers see opportunities and their brokers strive to enable clients to express their view.  But “shorting to zero” carries a risk.  Many hedge funds on IBKR’s platform understand that by shorting into a delisting, they may have to carry the short position for an indeterminate amount of time.  Therefore, some managers choose to buy back the short position earlier than that.  This allows them to redeploy any profits and the capital posted to meet shorting margin requirements into new ideas.

The popularity of shorting fixed income has markedly decreased YoY and short sellers are covering positions opened during last year’s tightening cycle.  With interest rates plateauing, this was not unexpected.  Fixed income is generally less volatile than equities, but carries a hefty cost due to the borrower (short seller) having to remit the coupon or divided payment amounts to the lender.  The iBoxx Liquid High Yield index returned -11% in 2022, but is up 12% YTD.

The IPO market was all but frozen in 2023.  A few issuers which poked their heads out of the ice hole such as Arm Holdings (ARM) and Birkenstock (BIRK) faced underwhelming performance in their shares after the initial “pop,” intimidating other private companies from going public at this time.  We always see demand from short sellers for highly-visible stocks after they first list.  IBKR makes them available as soon as possible.  Expiring SPACs, many of which were redeemed, were a non-story.  Do note that if there is lack of availability for shorting an instrument, traders can always contact Client Service and the request will be routed to the appropriate regional desk.  In the US, lenders generally push out all of their availability to their counterparties, including IBKR.  But in certain lending markets outside the US, we may have to ask for a “show” first.

Our bread-and-butter work is enhancing the IBKR platform to make it easier for short sellers and SYEP lenders to reach their goals.  We are proud that IBKR was featured as a Top Hedge Fund Custodian by Preqin.  Hedge funds require powerful tools in their quest to achieve alpha and they pick custodians which provide those tools at a low cost.  At IBKR, we make the same features which hedge funds request available to all of our clients.  In 2023 we launched the Securities Lending Dashboard to provide traders with a picture of what is happening in the lending market for stocks they are interested in.  The dashboad is powered by Orbisa, which provides world-class data to the buy-side.  You can find Orbisa articles discussing specific stocks in the Securities Lending topic. Canadian stocks which are active in the lending market were added to Trader’s Insight updates.

We widened the pool of securities available to both sell short and lend for income by expanding access to the Stock Yield Enhancement Program.  For example, clients of Interactive Brokers Singapore can now lend their fully paid shares.  Expanding access is an ongoing initiative and we are confident that clients will be able to take advantage of even more Shortable Shares at competitive rates in 2024.

While browsing the store aisles with Jingle Bell Rock playing in the background, we look back on a successful 2023 and prepare for an even better 2024.  Macroeconomics notwithstanding.