HiI have told that there are sock lending arbitrage opportunities, is this correct? If so how?Many thanks

I don't work in that market do can't comment on specific arbitrage opportunities their (e.g. borrowing stock at one rate and lending at a higher rate instantly)However there are good opportunities if you can get hold of borrow on stocks where borrow is difficult. There can also be tax arbitrage over dividend periods where you are short over dividend, so stock goes down by div amount, yet you only need pay say 85% of dividend out to the guys you borrowed the stock from, due to tax regulations

Speaking of Tax Arb, isn't there one in lending stocks to Euro institutions...can't remember the details.

BanfarStock loan is tremendously important for trades including the tax arbs already mentioned below, risk arbs you mentioned on another thread and derivative financing trades, e.g. long call, short put, short stock. Also for CB arb, index arb and equity statistical arb. But as a matter of terminology I wouldn't say that any of these are explicitly "stock lending arb opportunities" so much as arb opportunities that rely on secure stock loan.

Duffie in one of his papers on Lending (dont ask me to search ref - look the net) describes the full chain of borrowers/lenders behaviour dynamics. also one year ago there was the paper in "Derivatives" magazine about tax arbitrage (hint: in the same issue there war article by E.Derman about Physics in Market)nik

In one way, stock lending desks essentially take advantage of arbitrage opportunities while securing stocks to lend to trading desks. A trader will call a stock lending desk and say, "I will pay 50 bps annually to borrow stock XYZ." The stock lending desk will then try to find a custodian bank such as State Street that has stock XYZ available to lend. The stock lending desk will agree to pay State Street 25 bps and then lend it on to the trader at 50 bps, completing the arbitrage.The stock lending market is not as efficient as it could be. Locating stocks takes time by phoning around different stock lending desks. And price discovery is not as easy as it could be because some of it is based on relationships. If XYZ is a great stock to short, the available stock to borrow will eventually all be lent out to traders, even though the price to borrow it may not rise as quickly as it should, as the available stock to lend gets smaller and smaller.Stock lending in Europe is often driven by dividends. Germans dividends, for example, used to be worth over 150% to Germans, but only 72.5% to Swiss, due to tax treaties between the countries. These tax trades, however, are disappearing as tax authorities have started penalizing people for doing some of these tax dividend trades.

yeah, tax arbitrage (div arb) is really starting to disapear.. Italy is one of the only true very profitable div arb countries still out there.And I concur about how the stock loan industry is very relationship driven. Take the example of convertible arbitrage (utilized by several of sec lending's hedge fund clients). If you're on a stock loan desk and you know a convertible issue is coming to market, you will alert the state streets of the world about it in case they hadn't heard about it yet when placing you order to borrow the issuer's stock. Since you gave the state streets some market "color" (a heads up) you will hope for a larger allocation of the stock they have to lend out.I have one question as I am still pretty new to the industry - do larger trading desks respect the stock loan traders or do you think they are just order takers who kind of do riskless trading?

padraic: they didn't used to call them stock loan 'traders' and in my experience "greasy sales monkeys" would be more appropriate. As far as I can see, the job is "get intructed by client to borrow something, click a few buttons to borrow it, make tiny margin, maybe ring round a few other clients to get it, get instructed by someone in house who has to use you to borrow something, take a nice fat margin since they have to use you and there is no clear market price, mumble something about dividends and take up to confuse anyone who challenges you, make a mistake with a client, call up someone in house and mumble something about recall and you have to put their rate up to 15% from 3% to cover the loss, go out on the piss with your clients..."

of course, I'd be interested if any real stock loan traders want to comment on what they actually do!

Stock lending (repo) is a market in itself. It is the dark side of arbitrage. No arbitrage, no repo. But no repo, no arbitrage. It is a ask/demand market which reflect (mostly) the arbitrageurs, market-makers interests. It is the world behind the mirror. A good trader must put his head through the mirror sometimes, to see/feel what is going on...Good desks not only make fees between the buyer and the seller, they also have positions, sometimes huge, sometimes during months.

Us stock loan traders do a couple of things:1) Collect Fees for lending out inventory (market making).2) Trade Forwards on the security2) Try to make even more fees on procurring hard to borrow or impossible to borrow (that's when you clean it!)3) Play tax arb (illegal and dangerous, but hey, who cares, right?)4) Play div arb versus the options (Really clever, and hugely profitble, but that's all I'll say)It's by and large a bit of a dogdy business, as the market is not nearly as organized as the repo side of things in FI. But it's still the glue holding the equity universe together.

Padraicyou are right, Italy is the last place where div arb is still possible (for the last year...).Let consider buying a single stock future on dividend paying stock and deep ITM put options..

FDAX, I'm intereted in pricing the illiquidity of employee stock options. Does anyone ever rent long term call options? It seems to me that if i own stock, but rent it to you, I still own the stock, I'm collecting rent, and I've given up my liquidity, because now you've got it. How much is the rent? Does the rent increase with volatility, because i would think that it's more risky to rent volatile stock? Are rents much higher for start up stock?EOAdvocate

"rent", usually called stock loan fee or lending cost or whatever, is nto based on volatility or anything like that. It is only based on supply and demand of the borrow. Yes a start up stock is generally impossible to borrow as it is all restricted. As the float increases and more stock is available the borrow eases up. You do not give up liquidity as you can recall your stock at any time with no notice (unless you enter into some sort of term borrow agreement whcih you would expect to receive more fee for and is relatively rare. Generally if a stock is "retail" ti is harder to borrow as the institutions lending it have to go through all their retail account and pick up a few thousand shares from each to lend to you. The bigger the stock and the more institional it's holders the cheaper it is to borrow. Different countries have different rules and such. Japan is very hard and expensive to borrow stocks for example where you may pay 1 or 2 percent a year to borrow stock whereas in the states you pay 30 or 40 bps. What you pay/earn depends drastically on who you are and who handles your prime brokergae or whatever. As an individual personal accoutn I do not think you will be able t capture any of the fee. You buy stock on margin and the associated benefits. Your broker, in return for providing margin to you, can lend out your stock and earn any fees.

Thanks Beans, a 2% per year rent fee would make a big difference in the cost of delta hedging a long, illiquid call, but for 30 basis points the effect would be small. What happens in a sell crunch? Suppose you are my broker and I have a large long position with you in Hiflyer.com. You get a big short sell order from Marsha Insider which you fulfill by lending her my stock, selling it, charging her rent fees, and holding her proceeds plus a deposit. That night I see a chat post by JrHiFlyCPA claiming that major parts of HiFlyers bookings are non-GAAP revenue swaps. I order a rush sell ASAP. What happens next? Your firm has more sell orders than stock. Do you unwind Marsha's short and give me her proceeds at her selling price? Do you end her short by using her proceeds to buy back my stock and then execute my sale? Do you go rent more stock to execute my sell? Most important, do I suffer a significant selling delay such that I end up with pennies on the dollar?EOAdvocate