Market Power in the Securities Lending Market

50 Pages Posted: 10 May 2022

See all articles by Shuaiyu Chen

Shuaiyu Chen

Purdue University - Krannert School of Management

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 evidence of market power in the equity securities lending market, including non-competitive fee levels, market concentration, and low inventory utilization. Motivated by this evidence, we develop a theory explaining why this market structure may be preferred by both informed traders and shares lenders. Key elements of our asymmetric-information model are informed traders' concerns about information leakage and a recognition of the fact that shorting is a two-step transaction whereby securities are first borrowed and only thereafter can be sold. We estimate our dynamic model and evaluate the implications of non-competitive fees for stock valuations. We find that shares lenders obtain an incremental present value due to fee income ranging from 1.5% of extra value for large-cap, low-fee stocks to value inflations up to 25% for small-cap stocks, and even more than 100% for nano-cap stocks.

Keywords: Short selling, market power, custodian lenders, lending agents

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 - Krannert School of Management ( 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

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
161
Abstract Views
433
rank
259,344
PlumX Metrics