Hanweck: using options pricing to back out financing costs

A recent article noted that, “It’s gotten so expensive to bet against shares of Snap Inc. (SNAP: (%)) that the stock would have to keep dropping at least 5% every month just to recover the cost of financing those short positions.”

Unfortunately for many equity traders, the market’s view of stock borrow cost is not readily available. An institutional market with limited transparency, stock borrow/loan trading rates are typically quoted on a rolling overnight basis, and third-party data sources are reported on a T+1 basis. Even for securities finance professionals, it is not easy to get information on future commitments of stock borrow since there are few term-borrow (e.g. 3-month) deals.

Hanweck uses market and reference data from the equity and equity option markets to create an alternative data set of stock borrow data called “Hanweck Implied Borrow Indicators”. These are processed from real-time option data across the entire maturity spectrum of options, to form a composite view of market implied borrow rates for different time maturities. In essence, the data is crowd sourced, from a crowd that must make markets that accurately reflect real borrow costs (and future borrow risk) or else they would be arbitraged by other market participants.

In the case of SNAP, the Implied Borrow Term Indicators showed the stock at its most extreme hard-to-borrow levels in late June and early July of this year, with rates on the 45-day Indicator going past -60%. HanweThe overnight market for SNAP stock borrow also reached some of its most extreme levels in this same time frame, but unlike the term markets shown here, the overnight market persisted in extreme hard-to-borrow levels of -50% to -60% anticipating difficult conditions until the lock-up period on stock freed up more collateral in the end of July. The Hanweck Implied Borrow Indicators showed change in momentum of borrow levels, and for stock borrowers planning on staying short a longer period of time, the data reflected potential opportunities to borrow stock on term, either directly or synthetically using methods based upon option arbitrage strategies such as reverse-conversions.

Stock borrow rates offer additional value as a trading and risk indicator. It can be an important signal, if a stock not ordinarily hard-to-borrow suddenly becomes hard-to-borrow, or if the opposite occurs. The borrow market can also offer insights into the nature of certain prices in stock moves.

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