You can Only Lend What you Own: Inferring Daily Institutional Trading from Security Lending Supply

Abstract

Institutions make their equity holdings lendable, allowing us to use the daily change in lendable shares to proxy daily net institutional trading in each stock. Our proxy better tracks quarterly changes in institutional ownership than existing alternatives, or even a subset of actual institutional trades, especially if we allow the corresponding elasticity to vary across stocks. Using this proxy, we document (1) price momentum anomaly obtains only if institutional trading and intraday returns oppose during the portfolio formation period, consistent with under-reaction; (2) negative short-term return predictability, consistent with transitory institutional price impacts; (3) institutions unwind holdings before earnings announcements and re-establish them afterwards, suggesting the earnings announcement premium is trade-driven; and (4) institutions provide liquidity to retail investors, e.g., around stock splits.

Keywords: Institutional Trading, Security Lending, Lendable Equity, Proxy, Machine Learning