Borrow Fees: What Are They And How To Calculate Them

Posted By on Apr 27, 2015 | 0 comments

If you believe a stock has had an overextended run to the upside, initiating a short position in it would be the ideal trade. On the logistics side on being able to short stocks, it requires a few more steps as compared to getting long stock. Aside from having a margin account, shorting a stock requires having your broker "locate" the shares for you to short -- you are borrowing someone else's shares and selling them with a promise of returning them back in the future.

Stocks are classified in either 2 categories when determining shorting eligibility: ETB and HTB.

ETB - Easy to Borrow
Easy to borrow stocks are stocks that your brokerage house has plenty of shares to lend to short sellers. These stocks are usually widely held in accounts at the broker or can be borrowed easily through your broker's trading counter parties. There are no additional borrow fees to trade these securities short.

HTB - Hard to Borrow
Hard to borrow stocks are stocks where getting locates are difficult and sometimes impossible. This may due to extreme volatility of the stock, or just simply no available inventory of the stock due to its low float or overwhelming demand by short sellers. Since the inventory of available shares is extremely low and the appetite from short sellers creates a huge demand for these shares, brokers charge hard to borrow fees for shorting these securities.

How to calculate HTB fees?
Hard to borrow fees are usually listed in percentages. For example lets say $XYZ stock has a HTB fee of 20%. What this means is that you will get charged 20% interest on your short position annually for being able to borrow the shares. If I had a short position of $50,000 in $XYZ, my daily hard to borrow fee would be = $50,000 x 0.20 / 360 days = $27.78 / day

In some extreme instances HTB fees can be as high as 300%! Be sure to take into account any possible HTB fees when shorting stocks. The fees vary by broker in each security and some brokers do not charge HTB fees if you close out the position intraday while some do.

-Hubert Tsai

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