U.S. Equity Specials Trends | Seeking Alpha

Increased importance for hard to borrow equities

Revenues related to lending US equities at elevated fees saw a resurgence in the middle of 2019. These so-called “specials”, broadly defined as shares which can be lent for a fee of more than 5%, generated 68% of 2019 revenues for US equities, up from 49% in 2018. The ratio was fairly steady in the first quarter of 2020, with 70% of US equity revenues being derived from equities with an average fee greater than 5%.

There is a key distinction for 2019, and the early going in 2020, as compared with prior eras, namely the emergence of larger balances at higher fee levels, offsetting declining balances in the lower end of what would be considered a “special”. US equity loan balances with a fee greater than 5% peaked in 2015, with an average daily balance of $14.4bn. For 2019, the average was $9.5bn, a decline of 34% from the peak. Despite the decline in balances with a fee greater than 5%, the revenues associated with such loan balances have increased, reaching $1.9bn in 2019, the highest level on record. That equates to 68% of all US equity lending revenue.

The composition “special” balances changed dramatically over the last five years. Loan balances with a fee in the range of 5%-20% fell by $7.3bn between 2015 and Q1 2020, a 47% decline; Loan balances with a fee greater than 20% increased by $1.2bn over that time, a 56% increase.

A similar picture emerges when looking at the revenue from lending US equity specials. In 2015, $1.2bn was generated by lending US equities with a fee between 5% and 20%; that return dropped to $658m for 2019, a decline of $524m or -44%. US equities with fees greater than 20% returned $1.3bn in 2019, an increase of 82% or $600m, compared with $735m in 2015.

Putting the pieces together, total revenues for US equities with a fee greater than 500bps increased by 4% from 2015 to 2019; however, the portion of that revenue which was generated by equities with a fee greater than 20% increased from 38% to 67% over that time. It may be tempting to argue that the impact of Beyond Meat (NASDAQ:BYND) weighs heavily on the 2019 figures, and it certainly does have some impact, though removing the BYND-related $312m in 2019 revenues would only lower the ratio of specials revenue delivered by equities with greater than 20% fee to 61% in 2019. US equities with a fee greater than 5% contributed 66% of Q1 2020 revenues.


As the total balances with a fee greater than 5% have declined from the peak in 2015, balances with a fee greater than 20% have substantially offset the revenue decline. The borrow demand for US equity specials is often tied to specific themes, which notably included IPOs and cannabis related equities over the last year. More recently the energy stocks have seen increasing specials balances: The sector represents 9% of all balances with a fee greater than 20% as of April 24th, up from 5% at the start of 2020. Overall US equity loan balances have declined by 7% YTD, while balances with a fee greater than 20% are only down 0.5%.

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