Overstock CEO Uses Bitcoin Tech to Spill Wall Street Secret

wired.com / CADE METZ / 08.05.15 2:00 PM

THE GLOBAL STOCK market spans about $101 trillion in financial securities. And at any given moment, about $1.7 trillion is out on loan.

Hedge funds, mutual funds, and other traders don’t just buy and sell stock. They borrow it. Sometimes, they’re looking to short sell: If they borrow shares, sell them, and the price goes down, they reap a profit. Other times, they borrow as a way of hedging their stock positions or settling other deals. In the US alone, according to research from DataLend, about $954 billion in securities is typically on loan to some fund or another.

Many players benefit from this little-discussed market. Sure, the borrowers can make some extra money. But the same goes for those who lend the securities out, including retirement funds and other large stock holders. They charge a fee for that loaned stock. And, yes, middlemen take a cut too, including prime brokers such as Goldman Sachs and Morgan Stanley and dedicated lending houses, or “agent lenders,” like BNY Melon and State Street. The agent lenders alone make about $19.2 million a day helping organizations lend out their stock, and the prime brokers likely make even more.

It’s an enormously lucrative market. And it’s a market controlled by a relatively small group of players, most notably the prime brokers. “Securities lending has historically been a closed network,” says Josh Galper, who runs a financial consulting firm, Finadium, that closely tracks stock loans. “In order to lend or borrow securities, you need to be one of the players in this market.”