Can I trust brokers with my stocks?

Interactive Brokers has a stock lending program and shares half the profits with their customers who opt-in. They are transparent about how it works. (Basically they deposit cash collateral to your account to cover the stocks they’ve lent out).

https://ibkr.info/article/1839

I think many other brokers do basically same, but aren’t transparent and don’t share the profits.

Disclaimer: IANAL or a financial expert. This information is relevant in the US, but Swedish brokerages may do something similar.

In the US, brokers cannot lend out your shares without your knowledge. Brokerage customers can opt into a program called Fully Paid [Securities] Lending, in which the broker pays you a monthly fee to lend your shares out to short sellers. The fee you're paid is higher for securities that are harder to come by; shares of an up and coming marijuana company will be much more rare than large-cap stocks in the S&P 500. (Brokerages often own their own shares of popular stocks that they can lend out, so there's no need to pay customers for access to them.) You can recall the shares at any time, so they're still considered liquid. The only "catch" is that you can't vote as a shareholder without first recalling them.

Here are some product pages for FPL programs run by Schwab[1] and Fidelity[2]. Most (all?) large US-based brokerages seem to offer this in some form.

[1] https://client.schwab.com/secure/file/P-5182696/MKT33373-05.... [2] https://www.fidelity.com/trading/fully-paid-lending

Avanza supports loaning out stocks depending on the account type, it is only available on Kapitalförsäkring because otherwise the stock is in your name (on Depå / ISK). Also you get paid a premium if they loan your stocks. It is described on https://www.avanza.se/konton-lan-prislista/konton/kapitalfor... and includes a section about the risk.

The answer varies depending on brokerage, legal jurisdiction, and your account status(es). I wasn't able to find good English-language information on Swedish consumer financial regulation, and I suspect this particular concern is not one that is asked regularly.

That said, the following rules of thumb for American brokerages might be of interest:

* Securities held in cash accounts are not loaned out without the customer's approval. Brokers may offer a revenue-sharing agreement, for example IBKR's "Stock Yield Enhancement Program" at <https://www.interactivebrokers.com/en/index.php?f=46942>.

* Margin account agreements usually have wording allowing the broker to loan out securities held on margin. This is important for holders of dividend-producing equities in a margin account, because taxation of "payments in lieu" is different from that of qualified dividends.

* In both cases, loaned securities are covered by cash collateral. The exact percentage varies between brokers; as one data point, IBKR collateralizes the loan at 102% [0].

* Retail brokerages have insurance on the first $500k USD of assets per account, including $250k of cash, through the SIPC[1]. This is designed to protect customer assets if your brokerage enters liquidation, and although it doesn't protect loaned shares, it does protect your retail account from being impaired by another customer's short going wrong.

[0] https://gdcdyn.interactivebrokers.com/Universal/servlet/Regi...

[1] https://en.wikipedia.org/wiki/Securities_Investor_Protection...

Stick to large, well known firms. In the US, that's Fidelity, Vanguard, Schwab, eTrade, ... There are few 'fintech' players that have the weighty balance sheet you'd want when major market events occur. Trades are pretty cheap, even $0 for most standard trades on Schwab[0].

[0] https://www.schwab.com/pricing

Seems like Avanza competitor Nordnet is fairly transparent about loaning out your stocks. On by default for some account types (when the stocks are not in your name, e.g. KF account type). They will give you a cut of the gains. You can chose to opt out.

https://www.nordnet.se/se/marknad/aktier/aktielaneprogrammet

In the US, even reputable shops such as Vanguard lend shares out for short sellers. It’s one way to keep the fee low for consumers. I never heard of anyone losing their shares due to short sellers.

If you are worried about that wait until you learn about Cede & Co.

On US listed stocks there is a very good chance you don’t own them at all. You just have certain contractual rights to them.

(Note: I believe the counter party risk with lending for shorts or Cede & Co custody is extremely far down the list when talking about risks in the equities market)

>I asked the same two questions to my broker (Avanza in Sweden), and they haven't replied after 4 weeks.

Get a new broker. I've had some fairly complex securities questions in the past and my broker (Fidelity) always had someone on the phone to talk it out with or inquire further and get back to me.

1. Nordnet and Avanza both do this, but they let you opt out. Specifically to Avanza, if you have stocks in a kapitalförsäkring then you are automatically included and if you don't like this, you need to opt out.

2. Yes, looks like it. Have a look at https://www.avanza.se/konton-lan-prislista/konton/kapitalfor....

(Quick translation from the Avanza link: they have a security worth 105% of the value of the borrowed stocks, so if Morgan Stanley goes bankrupt, Avanza tries to buy the stocks back. If trading is stopped, or stocks cannot be bought back for other reasons, you'd be compensated monetarily.)

Other countries may of course do things differently.

IANAL

Technically you could lose shares loaned to short sellers, but it would happen under some pretty extreme circumstances. Basically, the short seller would have to go into default and be unable to return the shares; then, your brokerage would have to also be in default and be unable to buy the shares needed to return them to your account. I have never been in this situation but I think most brokerages would try to offer a cash settlement for the lost shares. If the brokerage is bankrupt and was unable to transfer your account to a solvent brokerage, then, as far as I know, you would be a creditor during the bankruptcy proceeding and would be "first in line" i.e. you would have to be paid before the bond- or stockholders of the company.

To compensate for this sort of risk short sellers must make interest payments, and usually brokers will share the interest payments with the client that they borrowed shares from (and thus the client must know the shares are being loaned).

[EDIT: Looked it up, should have done this beforehand; if your brokerage is in default, you would be entitled to withdraw the collateral the brokerage had deposited for the loaned shared.]

If you really care about this you must also pay attention to funds you hold, as (AFAIK) the vast majority of providers earn extra yield by lending out their holdings

https://www.investopedia.com/investing/role-securities-lendi...

> BlackRock, Inc. (BLK) managing director for securities lending Jason Strofs indicates that this is a significant business: "about $3 trillion of our assets we consider lendable, which consists of iShares ETFs, mutual funds, collective trusts, and separate accounts," he says. "Across that $3 trillion, roughly 9% of those securities are out on loan on any given day."

SLB is a double-edged sword, for example since it increases float it may also work to reduce spread, reducing transaction costs for everyone

It's a common practice for big brokers to have a custody option where your securities are held separately (as far as you are concerned), but usually it comes with more fees. If you don't want to take the risk of brokerage lending, then you have to enable custody and agree to have some extra fees.

Whether the benefits will outweight or not depends on your investment habits and which brokerage you use.

I'm not sure, but I think Degiro offers several account types, and at least one of them (custody) doesn't allow that type of behavior.

https://www.degiro.co.uk/helpcenter/faq/profiles/1068

You can opt out/opt in of stock borrowing on Avanza, there’s a setting.

1. You can’t easily.

2. All of the money you invest.

There's only one thing that grows in someone else's hand, and it's not money...

I’m not a lawyer but own a number of shares in a number of companies through IG in the UK.

Since you don’t really own the shares, the broker (in my case IG) hold them on my behalf in a ledger that simply allocates the shares to me then I imagine they can do what they like with the shares. So long as the money is there when you want to liquidate it then it’s irrelevant to some degree.

In the UK the value of the shares I believe is fenced off in a separate entity so that should the broker go bankrupt the money is still there for shareholders (ie shares bought in the platform, not shareholders in the brokerage) and inaccessible to creditors, this was tested in the high court in the UK recently when the administrators tried to use this ring fenced money to pay their fees as the broker couldn’t pay it themselves and the ring fence was upheld by the court.

Not sure if any of this helps but it’s good to remember you don’t actually own the shares, they are held by someone else and they can probably do what they like with it.