The art of the US domestic easy-to-borrow list
06 October 2015
The official easy-to-borrow list for your firm isn’t the list you begin the day with but the list as it stands at day’s end, says Rob Sammons of Anetics
Image: Shutterstock
According to US regulators, a broker-dealer may generate and post a list of easy-to-borrow securities for the benefit of its own customers to allow short selling in any name on the list, without the customer securing an explicit documented locate for the security prior to issuing the sell order. The theory is that any name that makes it on to the list is deemed to be readily available with a margin of adequate liquidity expected to be in excess of the day’s routine short selling. How to create such a list is as much art as it is science and requires knowing your customer as well as having deep and well-known sources for inventory supply.
As a technology vendor that provides a system to a number of different brokers to generate such an easy-to-borrow list, we’ve found the best method starts with a round-up of all the available supply that is being shown to the desk in sufficient quantity to achieve easy-to-borrow status. This inventory should be as of start-of-day (after the night cycle), not stuff left over from yesterday. And it should be from trusted sources that have an at least close-to-average track record of being able to provide securities shown on an availability list.
From this list of potential good names we start the vetting process—the art of determining what names to remove because of risk that the item may not be available on settlement date. We start with the obvious things, such as high rebate rate on current open borrows, a look at price and current trading volume, internal compliance restrictions and threshold status, and myriad other factors. We do this as a once-a-day process, early on, and the list should be good for the day. Well, maybe.
Since easy-to-borrow status is such an important factor in so many intra-day and end-of-day processes, it would be nice to think that a stock either is or isn’t easy-to-borrow for an entire effective trade date. This is important for everything from compliance reporting at end-of-day to determining the rate that gets applied in the locate and rebate allocation process. Easy-to-borrow items get one formula—premium and other items are handled differently.
The issue now is that regulators expect broker-dealers to monitor the easy-to-borrow status throughout the trading day, and if any event should occur that would alter that status, the broker must have a mechanism in place to remove the name from the list and update all locations and end-points everywhere the list may have been published. Essentially, you have to notify all of your customers and end users of the status change.
Some of our customers are even monitoring intra-day short selling in easy-to-borrow names and if the total short position is approaching the anticipated available quantity of supply, the name is removed from the easy-to-borrow list. Another event that would warrant removal is simply being unable to borrow a security in sufficient quantities to make today’s deliveries. Intra-day news and announcements can prepare a desk and let it know when a stock may become tough to borrow.
We’ve had to modify our processes to continuously monitor on a five-minute cycle all of the events that would keep a name off the easy-to-borrow list in the first place. Should such an event occur, we remove the name from the list (keeping track of this action in a second list), republish the list to all end-point users, and send an email notification with a report showing the name or names that were removed and why. We keep an audit trail of what time the name came off the list and if promulgated by firm personnel, who the person was to trigger the action. Some triggers are systemic based on a rule or algorithm.
A firm’s easy-to-borrow list used to be a sleepy little process that didn’t require much attention; it happened once a day and was then ignored. That is not the case in today’s US domestic trading world. The list requires constant monitoring for status change and the ability to remove any name at any time for any reason, with a corresponding method in place to ensure that all stakeholders have been notified and updated. The official easy-to-borrow list for your firm isn’t the list you begin the day with but the list as it stands at day’s end.
As a technology vendor that provides a system to a number of different brokers to generate such an easy-to-borrow list, we’ve found the best method starts with a round-up of all the available supply that is being shown to the desk in sufficient quantity to achieve easy-to-borrow status. This inventory should be as of start-of-day (after the night cycle), not stuff left over from yesterday. And it should be from trusted sources that have an at least close-to-average track record of being able to provide securities shown on an availability list.
From this list of potential good names we start the vetting process—the art of determining what names to remove because of risk that the item may not be available on settlement date. We start with the obvious things, such as high rebate rate on current open borrows, a look at price and current trading volume, internal compliance restrictions and threshold status, and myriad other factors. We do this as a once-a-day process, early on, and the list should be good for the day. Well, maybe.
Since easy-to-borrow status is such an important factor in so many intra-day and end-of-day processes, it would be nice to think that a stock either is or isn’t easy-to-borrow for an entire effective trade date. This is important for everything from compliance reporting at end-of-day to determining the rate that gets applied in the locate and rebate allocation process. Easy-to-borrow items get one formula—premium and other items are handled differently.
The issue now is that regulators expect broker-dealers to monitor the easy-to-borrow status throughout the trading day, and if any event should occur that would alter that status, the broker must have a mechanism in place to remove the name from the list and update all locations and end-points everywhere the list may have been published. Essentially, you have to notify all of your customers and end users of the status change.
Some of our customers are even monitoring intra-day short selling in easy-to-borrow names and if the total short position is approaching the anticipated available quantity of supply, the name is removed from the easy-to-borrow list. Another event that would warrant removal is simply being unable to borrow a security in sufficient quantities to make today’s deliveries. Intra-day news and announcements can prepare a desk and let it know when a stock may become tough to borrow.
We’ve had to modify our processes to continuously monitor on a five-minute cycle all of the events that would keep a name off the easy-to-borrow list in the first place. Should such an event occur, we remove the name from the list (keeping track of this action in a second list), republish the list to all end-point users, and send an email notification with a report showing the name or names that were removed and why. We keep an audit trail of what time the name came off the list and if promulgated by firm personnel, who the person was to trigger the action. Some triggers are systemic based on a rule or algorithm.
A firm’s easy-to-borrow list used to be a sleepy little process that didn’t require much attention; it happened once a day and was then ignored. That is not the case in today’s US domestic trading world. The list requires constant monitoring for status change and the ability to remove any name at any time for any reason, with a corresponding method in place to ensure that all stakeholders have been notified and updated. The official easy-to-borrow list for your firm isn’t the list you begin the day with but the list as it stands at day’s end.
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