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As result of the GameStop "upset", I came to realise that retail brokers not only make money by charging commission, but also by untransparently borrowing my stocks for shorting.
At this point, I want to know:
1. How can I find out if my broker borrows my stocks for shorting?
2. How big is the risk for me? Can I lose part of my stocks due to reckless shorting?
I asked the same two questions to my broker (Avanza in Sweden), and they haven't replied after 4 weeks.
https://ibkr.info/article/1839
I think many other brokers do basically same, but aren’t transparent and don’t share the profits.
On US listed stocks there is a very good chance you don’t own them at all. You just have certain contractual rights to them.
(Note: I believe the counter party risk with lending for shorts or Cede & Co custody is extremely far down the list when talking about risks in the equities market)
That said, the following rules of thumb for American brokerages might be of interest:
* Securities held in cash accounts are not loaned out without the customer's approval. Brokers may offer a revenue-sharing agreement, for example IBKR's "Stock Yield Enhancement Program" at https://www.interactivebrokers.com/en/index.php?f=46942>.
* Margin account agreements usually have wording allowing the broker to loan out securities held on margin. This is important for holders of dividend-producing equities in a margin account, because taxation of "payments in lieu" is different from that of qualified dividends.
* In both cases, loaned securities are covered by cash collateral. The exact percentage varies between brokers; as one data point, IBKR collateralizes the loan at 102% [0].
* Retail brokerages have insurance on the first $500k USD of assets per account, including $250k of cash, through the SIPC[1]. This is designed to protect customer assets if your brokerage enters liquidation, and although it doesn't protect loaned shares, it does protect your retail account from being impaired by another customer's short going wrong.
[0] https://gdcdyn.interactivebrokers.com/Universal/servlet/Regi...
[1] https://en.wikipedia.org/wiki/Securities_Investor_Protection...
Avanza supports loaning out stocks depending on the account type, it is only available on Kapitalförsäkring because otherwise the stock is in your name (on Depå / ISK). Also you get paid a premium if they loan your stocks. It is described on https://www.avanza.se/konton-lan-prislista/konton/kapitalfor... and includes a section about the risk.
In the US, brokers cannot lend out your shares without your knowledge. Brokerage customers can opt into a program called Fully Paid [Securities] Lending, in which the broker pays you a monthly fee to lend your shares out to short sellers. The fee you're paid is higher for securities that are harder to come by; shares of an up and coming marijuana company will be much more rare than large-cap stocks in the S&P 500. (Brokerages often own their own shares of popular stocks that they can lend out, so there's no need to pay customers for access to them.) You can recall the shares at any time, so they're still considered liquid. The only "catch" is that you can't vote as a shareholder without first recalling them.
Here are some product pages for FPL programs run by Schwab[1] and Fidelity[2]. Most (all?) large US-based brokerages seem to offer this in some form.
[1] https://client.schwab.com/secure/file/P-5182696/MKT33373-05.... [2] https://www.fidelity.com/trading/fully-paid-lending