> Simon Taylor, head of strategy at fintech firm Sardine.ai, said that the risk to users of Robinhood's share lending program will be "quite low" given the U.S. firm is behind the risk management ... "I doubt the consumer understands the product but then they don't have to," Taylor told CNBC via email.
This gentleman deserves some sort of award for lying with a straight face. The fact that CNBC bothered to quote him probably says a lot about the industry, the media and the people who look to them for actionable information.
It is a bit hard to estimate the risk and while it is a bit of an arrogant statement, you have cherry picked the quote:
> Most companies that offer such programs in the U.K. pass on 50% of the interest to clients. That is higher than the 15% Robinhood is offering to lenders on its platform.
> Share lending is risky — not least due to the prospect that a borrower may end up defaulting on their obligation and be unable to return the value of the share to the lender.
And
> > Simon Taylor, head of strategy at fintech firm Sardine.ai, said that the risk to users of Robinhood’s share lending program will be “quite low” given the U.S. firm is behind the risk management and selecting which individuals and institutions get to borrow customer shares.
And then the full quote:
> Simon Taylor, head of strategy at fintech firm Sardine.ai, said that the risk to users of Robinhood’s share lending program will be “quite low” given the U.S. firm is behind the risk management and selecting which individuals and institutions get to borrow customer shares.
So putting this in context, Robinhood seems to be vetting and selecting the investors that can borrow through the program and maintaining collateral to mitigate risk of default.
That vetting and risk mitigation is likely why they’re giving only 15% of the interest captured instead of 50% you might get elsewhere but I don’t actually know the official T&Cs of Robinhood vs competitors. Just trying to infer the likely situation.
Of course that doesn’t mean the risk should be dismissed so easily and as we saw with FTX and SVB changing market conditions can easily break your model of solvency. In particular,
> equal to a minimum of 100% of the value of your loaned stocks at a third-party bank
Does this mean at the time of the loan or will they continuously rebalance as the value of the stocks changes? The former means you risk not getting your loan back if the value of the stock skyrockets and the counterparty can’t cover their spread on the short. The latter means that they risk running out of liquidity if someone took out a huge short on a stock that went up a lot in value. Both cases pose tremendous risk for the investor themselves.
Given how there’s claims that Robinhood was colluding with Citadel and others shorting GME, this could be yet more shadiness.
Firstly I would be surprised if they were doing vetting and due dilligence over and above what a normal broker does before allowing shares to be lent as this is a regulatory requirement. It really is just most likely them ripping off their customers.
To answer your question about continuous rebalancing, generally it is done daily using a process known as "Variation Margin"[1], and it's incredibly standard and done by every broker. In order to take out any kind of margin position (and stock borrow is included in this because the reason you would borrow is so you can sell short, which gives you a leveraged position and therefore margin is required) with a broker you post some collateral (usually the assets you already have in the account) and they give you some credit which you can think of as buying power. You can now trade using this rather than just using your cash, however on a daily basis as the present value of your positions changes, if it dips below a limit, they will ask you to post some additional collateral (this is known as a "margin call") and if you can't post, then the broker will begin liquidating your positions to get you back within the limits.
So, if you're lending your stock, then someone with that kind of margin arrangement is borrowing them and selling short and Archegos[2] and Peleton[3] are much closer to the situations you need to worry about than FTX and SVB. That is, the risk you are concerned about is that between their margin being adjusted one day and the next, the counterparty who borrowed your stock jumps to default (Meaning they go directly from being fine to being bust in one jump like in Monopoly where it says "Go directly to jail, do not pass go, do not collect $200") before they get asked to post additional collateral or their position gets liquidated (and the stock returned to you).
Non-technical explanation: You lent them your stock. What you're worried about is they go bust so quickly that the risk controls don't kick in and now your stock is among assets going through a bankruptcy and it could be ages before you get it back.
Notice that in both of the peleton and archegos cases big investment banks with big risk management functions, a ton of inside information and a _lot_ of money at stake lost a ton because they allowed counterparties to take more risk than they should. LTCM would be another great example[4]. RH is going to do a far inferior job of counterparty risk management than they were able to do. Counterparty default is a significant risk, which is why 15% is really inadequate compensation, and you're much better off using someone else. But in my view, RobinHood is a really terrible broker anyway so I would never recommend them. It sort of baffles me that people use them at all.
Considering Freetrade give 50%, and will manage selling the collatoral and then cover any gaps if it does meet the value if the borrower default this does not sound like a great deal.
This gentleman deserves some sort of award for lying with a straight face. The fact that CNBC bothered to quote him probably says a lot about the industry, the media and the people who look to them for actionable information.