Market Power in the Securities Lending Market

84 Pages Posted: 10 May 2022 Last revised: 27 Nov 2023

See all articles by Shuaiyu Chen

Shuaiyu Chen

Purdue University - Mitchell E. Daniels, Jr. School of Business

Ron Kaniel

University of Rochester - Simon Business School; CEPR

Christian C. Opp

University of Rochester - Simon Business School; National Bureau of Economic Research (NBER)

Date Written: May 4, 2022

Abstract

We document the presence of market power in the equity securities lending market and evaluate its impact on different investor groups and valuations. Our analysis reveals high market concentration, non-competitive fees, and low inventory utilization in the cross-section of stocks. Motivated by this evidence, we develop and estimate a dynamic asymmetric-information model that sheds light on the benefits of this current market structure for both security lenders and short sellers. We find that lending fee income raises shares lenders’ equity valuations by 1.5% for large-cap, low-fee stocks, by up to 25% for small-cap stocks, and by even more than 100% for nano-cap stocks. Our model yields estimates of the distribution of alphas from shorting different segments of the cross-section of stocks, indicating that fees reduce short sellers’ profits by about 60%.

Keywords: Short selling, market power, custodian lenders

JEL Classification: G12, G23

Suggested Citation

Chen, Shuaiyu and Kaniel, Ron and Opp, Christian C., Market Power in the Securities Lending Market (May 4, 2022). Available at SSRN: https://ssrn.com/abstract=4100699 or http://dx.doi.org/10.2139/ssrn.4100699

Shuaiyu Chen

Purdue University - Mitchell E. Daniels, Jr. School of Business ( email )

1310 Krannert Building
West Lafayette, IN 47907-1310
United States
5853198838 (Phone)
47906-1744 (Fax)

Ron Kaniel

University of Rochester - Simon Business School ( email )

Rochester, NY 14627
United States

HOME PAGE: http://rkaniel.simon.rochester.edu

CEPR ( email )

London
United Kingdom

Christian C. Opp (Contact Author)

University of Rochester - Simon Business School ( email )

Rochester, NY 14627
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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