Hey guys, it's sasha, there is a big problem in the world of investing and that problem is share. Lending a lot of people do not know that their broker is even doing it and perhaps don't really understand the risks involved. So let me explain exactly what the big problem is, with your broker, risking your investments to make a quick buck for themselves, but first we need to understand what share lending is and exactly how it works. Brokerages and other financial companies that hold shares can sometimes go and lend to those shares to third parties in exchange.

The broker is, then paid a commission, and this is a way for the broker to earn some extra revenue on top of whatever fees that they already charge their customers. The two most common reasons why shares are borrowed are to short stocks and to provide trading liquidity. You might have already spotted the first small problem. Don't worry, i'm going to work up to the big problem stay with me now, if you go and buy shares with a broker, you load up your hard-earned money into their platform.

You buy the shares with that money and naturally you want the share price to increase so that you can then earn a return. That's how investing generally works, but in many countries around the world, including the uk and the us share lending, is a perfectly legal and fairly common practice. A lot of brokerages a lot of big financial companies engage in it, so the broker goes and takes your shares that you paid money for and goes and lends those shares out. This is very common.

Many brokers do it, and even many of the big etfs do it as well. So if you're investing in the s p 500, it is likely that some of the shares that are part of that etf are also lent out at any one time. The brokers do it because it earns them a whole lot of money and the best bit is they don't actually even take any risk? No, you are the one taking all of their risk so that they can go and earn the money i'm going to get to that point in just a second. So who are the people? Borrowing your shares off you well, the first group that i mentioned the short sellers.

These are the people who wants to bet that the share price of a stock is going to go down. So what they do is this: they go and borrow the stocks. Then they go and sell your stocks, the ones they just borrowed from you. Then they sit around and wait and hopefully eventually the price does drop, and the idea is that when the price does drop, they then go and buy those same shares back at a lower price and give those share price shares back to you and the difference between The price of which they sold and the price of which they bought back is their profit.

So you can already see the first issue because, after a short seller has sold your stock, their incentive is to do absolutely everything in their power to reduce the price of the stock that is literally their business model. These people will literally go on cnbc they'll. Go on twitter they'll go everywhere else possible and do everything they can to discredit the company. You can see this every single day.

They will often post false allegations, make things up or try to blow things out of proportion. Some of those things may be illegal, but it doesn't really stop them. So the person who has borrowed your shares literally gets to work trying to reduce the value of your shares. A fun fact is that most lending platforms that do share lending, don't give you any choice in the matter.

Not only that, but they they are the ones who get to keep all of the profit from lending your shares, so the broker takes your shares, gives them to the short sellers and then both of them and the short seller get to make money. Guess who the sucker is, who gets to potentially lose money in the process anyway? The other group that often borrows shares are trading platforms. Traders like to buy and sell shares and relatively quick succession, loads and loads of trades. Every single minute.

These guys have 20 monitors stacked in front of them, with a million different numbers going up and down. They don't have the time to wait two days for trades to settle before they make the next transaction, so the trading platforms will often then go and borrow a whole bunch of shares to provide that liquidity for their traders to make trades where they trade share sitting. In a common pool to allow for higher volume and faster pace of transactions being made now, i am simplifying this a little bit here, but you get the point. The traders may not necessarily be as bad for your share price as short sellers.

They don't have the direct intent for the share price to drop, not in every case anyway, but they are pretty bad for volatility of your stock price, because these guys literally make money from volatility. That's their job and the high activity that they generate with large volumes of trades is what creates that volatility in the first place. So there you go. The people who borrow your shares have exactly the opposite objective to you with your shares.

They benefit from the share price, having higher volatility and from it dropping in value, and they actively participate in and encourage both of those things to happen. But that is not even the bad thing we haven't got to the really bad thing. Yet. The bad thing is that the risk of this is not properly explained by the brokers or understood by their customers, and there is a risk because i guess you won't want to explain if you're a broker that your customers take all the risk and none of the Benefit of this amazing practice, the broker wouldn't want you to realize that they are making free money using your assets.

So here is how the transaction typically happens. It's important to understand this. The company that wants to borrow your shares, comes to the broker and says: hey. Give me a hundred shares of tesla.

I want to short it to oblivion. Can you please lend me some shares that your customers own your broker, says no problem here are 100 shares of tesla? Please pay me 10 interest per year, plus a commission. The champagne we drink in the office is very expensive, so you know hence the pricing. The person who has then borrowed your shares provides collateral back to the investment platform.

This is a legally enforced measure that exists to protect. You in the case of the short seller goes bust or something like that happens. Something happens where they can't return. Your shares back to you.

The problem is the protection here sucks and is absolutely not properly explained. How much it sucks to the customer? Usually the collateral is going to be worth slightly more than the value of the shares being borrowed, maybe around three percent more. It varies and the collateral usually comes in the form of cash or quasi cash, things that are very much like cash, something like government, bonds of you know a few years out, so they borrow 100 shares of tesla at let's say: 800, that's 80 000 borrowed and They then go and put up 82 400 as a collateral, so 80 000 plus the three percent. There is a segregated account where the ownership of that 82 400 worth of cash and bonds goes over to your broker.

Who holds it on your behalf? If things were to go sour, the idea is that the short seller, if the short seller goes burst and can't get the shares back to the broker, the broker can then just take that collateral and buy back the same shares for you and return them to you. So there is no risk right well, the most common way to manage this collateral is on a daily aggregate basis. At the end of the trading day, the short seller and the broker go and check how much the share price for the assets has moved and adjust. The amount of collateral being held up or down - and here is the big problem.

Let's say the short seller has gone to town and shorting the stock that they have borrowed, while also leveraging themselves to neck because they are greedy. They are a typical hedge fund. Then the price of tesla decides to skyrocket, for example, by 20. You know they have two huge new factories opening they're going to start deliveries in the next week.

The macroeconomic environment looks better. Maybe russia pulls out of ukraine at the same time, they're going to announce ridiculously good q1 results. There can be things that can drive, share price and teslas can be volatile. So, let's say in this example: the share price goes up 20.

The short seller is squeezed really hard, especially because the greedy bastards are leveraged really hard. The guys over on wall street bets smell blood. They go and hear about this, and they go absolutely nuts. They decide to go and buy a hole in little tesla stock.

They decide that short, squeezing the fat greedy cows from wall street is exactly what they want to do today. So the 20 gain very quickly turns into a 50 gain, as the daily trading volume for tesla shares doubles or triples. It sounds absolutely ridiculous and extremely improbable, but we literally had this exact scenario play out not once but two times with amc and gme in the last year, so it might sound ridiculous, but it is also something that actually happens. So the short seller goes bust at the end of the trading day, as they are margin called.

This also has happened in the last year with big and previously highly reputable companies, and so your broker is sitting there. One minute after the stock market has closed with the beads of sweat pouring down their forehead, because you see the short seller has just gone bust and they don't have any of the shares that you think you own. The collateral only covers 103 of the share price. Before the big rally, so the remaining 47 has just gone missing and guess what? In this scenario, according to the typical agreements that many of these brokers force you to sign, you are liable for that loss.

So your eighty thousand dollars worth of tesla shares became a hundred and twenty thousand dollars after going up by fifty percent, but the broker twiddles their thumbs and gives you back in the best possible scenario that eighty two thousand four hundred dollars worth of collateral. So you've just lost the 47 worth of gain for no apparent reason whatsoever other than the broker's greed. The typical terms that many of these brokers just force you to sign make it your problem. They will do their best to return the shares, but if not boo hoo, you get to pick up the collateral instead, except in a situation like the one i just described, where you just lost a whole boatload of money, probably without even knowing that your shares were Lent out by the greedy broker in the first place, but wait it gets a lot worse.

If the stock market goes on a massive rally and rebounds, then typically at the same time, the value of bonds will drop, the yields and bonds will go up and the bonds will tend to drop in value when interest rates go up as well and over the Next year, we're going to have a heck of a lot of interest rate rises, so if losing 40 000 is not bad enough, the value of the collateral sitting there on that day will probably also drop in value at exactly the same time. So you'll have another. Few hundred or maybe a few thousand dollars down on top a nice little extra sucker punch and if that does happen to a popular stock like tesla, i am guessing. The small brokers are going to have a crazy amount of pressure from both the regulators and their customers.

So there is every chance that your broker will collapse in the process as well, and that's when we're really going to find out just how well in practice the fscs prediction in the uk works for amounts above 85 000 pounds and exactly how it does or does Not cover the loss that you've just pocketed because you lost your loaned out shares because remember: fscs is only really there to protect you. If the broker are one of the counterparties that use to hold your assets goes down, it is not there to protect you against trading losses that have already been incurred. Want another nice sucker punch, no problem, the guy who borrowed your shares. To short, the stock also gets to vote using your shares, instead of you on top of everything else.

So next time there is a big shareholder vote where one decision will either help the company or maybe hinder it, but it has to go to a shareholder vote. You go and look at your investing account, trying to figure out how you go and vote in your favor, but then you realize that all of your shares were lent out and it is the short seller who gets to decide how to vote nice. So now some brokers do build in some systems to recall the shares in time for some relevant votes. But then again, a lot of these new brokers haven't even got the technology to let you vote with your shares in the first place, and there is no legal requirement forcing them to let you vote anyway.

Even if you do hold shares, because you know a legal right as a shareholder to vote on matters that are important to your shareholding, is way less important than the broker making ridiculous amount of money using your shares without taking on any of the risk. That is, unfortunately, the world we live in. There is a small number of brokers like interactive brokers, for example, who actually give you the choice on share lending. You can choose to lend out your shares held with interactive brokers and you get to keep 50 of whatever it is that they earn from doing it, and that puts them in a very different bracket.

You have the power you're in the driving seat to decide, and you also actually stand to gain something from it. Now some of the older big platforms to their defense do have a policy of not lending your shares out. For example, hargreaves, lansdowne and aj bell in the uk. Both categorically say that they do not lend your shares, but then again, if you want to use their platforms, you will have to pay really quite expensive fees.

You have to pay one percent for an exchange fee give or take. You have to pay per transaction. Uh fees for every single trade you make and a bunch of other stuff things like annual management fees. Some of the new platforms also do not lend your shares, but that is often not because the platform places particularly high value on their moral issues.

It is usually because they just haven't gotten around to doing it yet to build out the process and all the steps that it entails. They'll see the dollar signs eventually in many of the cases and go after the money, don't you worry the two biggest new platforms in the uk trading 212 and free trade, both lend out your shares, so there is a reason why they can afford to not charge. You, the sort of fees that hargreaves lands down charges, so there is that at least payment for order, flow and hidden above market spreads are both illegal in uk. So we don't have to worry about those sneaky tricks, while people in the u.s and other countries have to worry about all of those on top of share lending, and it is true, the risk of you losing your money is not all that big.

The example. I just went through will not happen every week, i'm not trying to pretend that it is somehow likely or somehow common, but the problem is that, while the probability is definitely low, it is also not zero. In fact, if a situation like the one i just described did happen, the different events that cause it to happen are all part of the same chain reaction. The jump in share price causes the pressure on leveraged short positions that causes the counterparty failure to occur and the loss in collateral value.

It might seem very, very improbable, and i am sure that the brokers would tell you that it is absolutely something that will not happen until it does, and it is very odd that regulators seem to be completely oblivious to this fact and generally ignore it. It is almost like the people involved stand to benefit financially from this practice, because there are very few other plausible explanations for why the regulations around it are so loose. Of course, i am not accusing anyone of anything here, i'm just voicing some random, completely incoherent and absolutely nonsensical thoughts for no reason whatsoever. There are a lot of people out there who will argue that short sellers are a good thing because they help regulate the stock market.

They keep share prices in check, but the truth is the practice of short selling is just a filthy parasite. It feeds on the stock market, sucking money out, but adds absolutely nothing to it. The entire purpose of capital markets is to allow companies to raise money from the public to help grow their business and to support it when required and short sellers are like a disease. A virus that is sort of useful from an overall biological point of view.

You know it kills off the weak and the frail, and it helps natural selection and all that, but it is still a dirty pathetic virus that contributes absolutely nothing. So there you go. If you found this video interesting, please don't forget to smash the like button for the youtube algorithm. Thank you so much for watching.

I really really appreciate it and, as always i'll see you guys later, you.