Hard-To-Borrow Fees

There may be a wrinkle for anyone crazy enough to short sell a leveraged ETF depending on which broker you use: the “hard to borrow” fee. This is a fee that is levied on top of any interest charged on borrowed securities (borrowed from inventory so that you can short them). For example, while Interactive Brokers will allow you to short FAS (Direxion Daily Financial 3x Bull Shares) and charge you 1.68% in interest, it will also levy a hard-to-borrow fee which as of May 25th, 2009 stood at 23.81%!

Where does this magical fee come from? The rationale is that the prime broker has to spend a lot of time sourcing the stock to be shorted (they need to put it in their own inventory), and if it is hard to find, it becomes “hard to borrow” for you.

How do you calculate what the hard to borrow fee is? I don’t think you can. I believe each firm has their own pricing model, and all you can do is get a quote before making your short on a hard to borrow stock (your brokerage will have a list, similar to how they will have a list of short-eligible stocks in inventory).

I’m calling around to find out how ubiquitous this practice is amongst some of the other brokers, I’ll keep you posted…

Preet Banerjee
Preet Banerjee
...is an independent consultant to the financial services industry and a personal finance commentator. You can learn more about Preet at his personal website and you can click here to follow him on Twitter.
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Showing 12 comments
  • Ink-Stained Gorilla

    Preet,

    I think the lender did the math on the shorting scheme. To me this seems to validate your thoughts about shorting in a volatile market.

    Sadly this all seems reminiscent of the types of practices you see with a sports betting operation….

  • Michael James

    I’d be interested in learning more about the fees involved in shorting. The one time I was short stock, I was charged “INT FR” at 9.75% at a time when positive cash balances were paid 5% interest. In trying to parse “INT FR”, I’m guessing that “INT” is interest, but I have no guess for “FR”.

  • Preet

    @Michael James: FR usually means “from” followed by the date you shorted, and then ends with THRU meaning “through”, followed by the date you closed your short. THRU may not appear if you have not covered your position, but sometimes it will still appear to be the end of the reporting period. Any chance you remember if there was a date on that line of your statement? That might confirm it…

    Questrade has no hard-to-borrow fees, just interest on debit positions which is prime + 1.5%, or 3.75% right now. The spread is still a big money maker, no matter what.

  • Michael James

    Thanks for the explanation. The “FR” did precede a date.

    If charging this “interest” for short positions is typical, then it makes no sense for retail investors to ever short anything where the expected returns are over a period of months or more.

  • Preet

    @Michael James – I agree, the hurdle becomes that much higher for break even. The short proceeds could be put into a GIC to reduce the height of that hurdle, but it will still exist. There will never be a situation (for long anyways) where the interest charged to a retail investor would be lower than what they can earn.

    Hmmm… want to start up a securities lending shop with me? :)

  • Holly

    Thanks Preet for this subject. Recertly I had nightmare with Zecco who claim free trading but with huge hidden charges. They charged me this hard to borrow fee $5/day almost EVERYDAY even after I covered!!! And very insane is that I was shorting the same stock NTAP from Scottrade at the same time, yet Scottrade didn’t charge me once with this so called HTB fee. So I don’t understand why NTAP is HTB for Zecco and why got charged everyday? isn’t this something wrong?

  • JohnnyH

    Hilarious! Where did you find this fee at Preet? I use IB as well. Do they keep a table somewhere?

    I would have expected a little better from IB…

    • Preet

      @JohnnyH – I called IB directly and they pointed to a page on their site which lists the current rates. With some searching you should be able to find it (rates change constantly – probably related to implied volatility)

  • Jim

    Preet, why is the investor charged 1.68% in interest? When you wrote this article, was that the current margin rate at Interactive Brokers?

    I am trying to get a handle on which fees are charged for shorting an equity and how they are broken down. I understand that the inventor/speculator as always charged the standard commission when sell a short position, just like he would if selling a long position.

    My understanding is that if an inventor sells short a triple-leveraged fund in the US, he has to put up 90% of the cost to cover the short position. For example, if the inventor sells short $10,000 worth of a triple leveraged fund, I am under the impression that he has to have $9,000 worth of cash collateral in his account. If the equity increases in value, e.g., so that it would now cost $11,000 to cover the short position, the inventor would need $9,900 in money collateral. I thought that if the investor had enough cash in his account, the brokerage simply, took money out of his account and held it in trust. For example, if the investor holds a short position that could be covered by paying $10,000 and holds $25,000 in an interest-bearing money market account with his brokerage, the brokerage would take $9,000 out of the $25,000 in the money market account and hold it in trust. The inventor would then not be earning any interest on that $9,000.

    Is this how brokerages handle short sales? Obviously if the investor doesn’t have sufficient money in the money market account, the brokerage would then borrow the $9,000 on the margin and charge margin fees for doing so.

    I guess I just am not clear of the source of the 1.68% interest rate in your example.

  • Frank Edwards

    There are stocks catagorized as Easy to Borrow as well as Hard to Borrow. You are not charged for shorting Easy to Borrow stocks. The Hard to Borrow fee for each day is the price demanded by the owner of the shares. There is also a pricing mechanism whereby the neagtive borrow rate is determined via an auction and is also collected by the owner of the sharers of stock.

  • Preet

    Great info Frank – thanks for sharing.

    Preet

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