Market Power in the Securities Lending Market

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.

Short-selling securities lending market power custodian lenders