An Analysis of Over-the-Counter and Centralized Stock Lending Markets

Abstract

This study provides novel evidence about the functioning of the centralized and the OTC stock lending markets in Japan, and show that in general the OTC market has a superior role in promoting pricing efficiency. In the subsample where the OTC market supply is limited, the centralized market relaxes short-sale constraints but it is still unable to fully substitute for the price discovery role of the OTC market. Overall, these results call for regulatory caution in pushing towards centralized stock lending because relatively informed institutional traders may be hesitant to participate in the centralized market to protect their private information.

Keywords: Centralized Stock Lending, OTC Stock Lending, Pricing Efficiency, Short Selling, Short-Sale Constraints

JEL Classification: 12, G14, G18