Monday, July 26, 2010

Psst, Wanna Borrow Some Shares?

Author’s note: I think this should have been headlined, “Psst, wanna LOAN some shares?”

Some brokerages now allow certain customers to lend shares to short sellers, nabbing profits in the process.

SEVERAL BROKERAGES RECENTLY instituted programs allowing wealthy investors with big positions in hard-to-borrow stocks to lend those shares to short sellers, generating interest income in the process.

The ability to place shares into the lending market differs significantly from selling a covered call, which nets the seller income, or premium, in return for giving the buyer the right to purchase the stock at a particular price at a future date. If the stock doesn’t hit that price, the call seller gets to keep his shares, as well as the premium.

Lending shares affords an investor who doesn’t want to risk having a stock called away an opportunity to maintain ownership and also profit from the loan.

Says Fidelity ( customer Ron Kimmich of Chardon, Ohio: “I’ve been fortunate to have stocks that people want to borrow—and they have paid me handsomely for” the shares.

Kimmich has about 100 stocks in his portfolio, and is lending shares of eight companies. He says that Fidelity Capital Markets contacted him in March 2010 and informed him he had several stocks that were in demand by short sellers, who make bearish bets on securities. The shorts sell borrowed shares, in the expectation that they will be able to buy them back at lower prices later.

Kimmich says he was “uncomfortable” with the idea initially, but that the steady income stream has changed his view. He says he uses the income generated from lending to help defray trading costs for his shorter-term holdings.

Not every broker allows investors to lend out shares, and not every investor qualifies for the opportunity. The obstacles are partly technological, but also relate to whether customers hold stocks that others want to borrow. According to Peter Sosnowski, senior vice president of retail brokerage at Muriel Siebert (, “it’s for more sophisticated clients, and for people looking to generate a little incremental revenue while they own a position—as long as there is a demand for those securities in the marketplace at that specific time.”

Although the criteria vary from broker to broker, those we consulted said a qualifying customer must have more than $500,000, and in some cases $1 million in assets in an account, and hold a large number of shares of the in-demand stock. Brokers report that equity-index and currency exchange-traded funds, and equities such as American International Group (ticker: AIG), Sears Holdings (SHLD) and Garmin (GRMN), are most in demand.

In most cases, candidates for lending are informed by their brokerage that they hold stock of value to short sellers, and are asked if they would like to participate in the brokerage’s program. The annual interest rate varies from stock to stock; the lowest rate is around 2% of the value of the shares loaned, but rates can range as high as 80%.

can participate in the stock-lending program administered by Fidelity Capital Markets. Both firms clear through National Financial, a subsidiary of Fidelity. Making a stock available to lend out involves some administrative work, including the signing of a lending agreement with Fidelity Capital Markets.

Customers of Interactive Brokers ( can lend their shares via a specialized trading tool integrated into the company’s trading platform, Traders WorkStation (TWS). The tool is available to IB customers who qualify to buy securities on margin, and it provides access to the stock-loan market. IB’s clients list their securities on the AQS platform, an all-electronic, direct-access securities-lending market for U.S.-based stocks operated by Automated Equity Finance Markets.

Another IB tool, the Yield Optimizer, lets customers see which of their holdings could be generating interest income for them if they lend these holdings out. The Yield Optimizer also helps short sellers determine whether it is cheaper to borrow stock through AQS or directly from IB.

Kimmich, the Fidelity customer, says that the stocks he is lending are displayed in his portfolio report, and are flagged with a “loan” marker. Fidelity deposits the interest income into his account around the fourth of each month in a single transaction; he can obtain a detailed report online of the interest rate he’s getting for each stock.

Fidelity enhanced its program in February, making more information available online about securities on loan. It is possible to sell a stock that you are lending out by using the usual online tools. Previously, any transactions affecting loaned stock had to be done with broker assistance. When you click on the “Loan” link in the portfolio display, you’ll get an online summary of the securities you are lending, including the current value of the loans and the interest rate accrued.

Involving retail clients in lending “has been in and out of favor on a global basis for the past 20 years,” says Tim Smith, a senior vice president of SunGard Securities Finance. “The main stumbling block has been the lack of transparency in terms of both risk and reward, and the [assurance of] protection to someone who would not be an expert in this activity.”

Loaned securities aren’t protected by SIPC (the Securities Investor Protection Corp.) if your broker or clearinghouse fails. Therefore, the clearing agent must post collateral of cash and securities equal to or greater than the value of the securities on loan, marked to market at the close of each trading day. In theory, then, the loan is 100% covered—even better than they would be by SIPC. Should the borrower go bankrupt, the shares are returned to the lender.

THERE ARE A FEW OTHER wrinkles associated with lending shares. Dividends earned on stocks lent to others are taxed as non-qualified income, meaning you’ll pay ordinary rates, not the 15% rate on qualified dividends. You’ll also lose voting rights on lent shares, although you can recall the shares if there is an important issue you’d like to vote on.

A bigger issue is the possibility that you might be betting against your own net worth by loaning stock you hold to those who believe the price will go down. According to Gregg Murphy, Fidelity’s Senior VP of retail brokerage, “those who think that way just don’t participate. Typically, we see very educated investors take part in the lending program.”

Brokerages such as E*Trade and MB Trading don’t have programs to let customers lend securities. But the success of the early adopters could mean more initiatives soon will be under way. 

Published in Barron’s, July 19, 2010. 

Posted by twcarey on 07/26 at 01:39 PM
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Saturday, July 17, 2010

A Bank With a Unique Broker Niche

EverBank’s online-brokerage services aren’t cheap, but they include an intriguing way to park cash in nondollar investments.

BANKING GIANTS LIKE Wells Fargo and Bank of America aren’t the only ones offering online-brokerage services. Consider EverBank (, which has been around for a decade, but just made it onto our radar.

Like most banks, the Jacksonville, Fla., lender doesn’t push the envelope on broker technology and pricing. For example, you’ll pay $10 a month for streaming real-time quotes, which are free to customers of most online brokers. However, EverBank does have a few tricks up its sleeve that can make it worthwhile for those interested in foreign currencies or precious metals, two areas that have gained more investor attention amid volatile equity markets.

A recent upgrade added Financial Manager, which is an account-consolidation tool powered by Yodlee. This allows you to view non-EverBank assets and liabilities, providing a more complete balance sheet. Using Yodlee’s secure log-in, customers enter their user IDs and passwords from other financial sites, such as those of brokerages, credit-card firms, and lenders, and the Financial Manager draws a more complete picture.

Says Jane Dulle, a senior vice president at EverBank: “One of our key value propositions is that customers can use our checking and money-market accounts to park their uninvested cash, and get a view of what’s going on with all their accounts at once.”

WORLD MARKETS IS EVERBANK’S specialty-business line, allowing clients to hold foreign currencies at relatively low minimums, as well as foreign-denominated money-market accounts. There are approximately 20 currencies available for money-market accounts, along with certificates of deposit (CDs). The bank also creates and sells index CDs that are set up along themes, such as petroleum countries or emerging markets.

EverBank also permits customers to hold gold or silver through its World Markets offering. You can buy “allocated” or “unallocated” metals. Allocated metals are owned directly by the investor, in the form of coins or bars held in custody by the bank. Unallocated metals aren’t owned directly by the purchaser, but have lower minimums and no storage fees.

Dulle says most of EverBank’s brokerage customers started out with a bank account, then opened a brokerage account for the convenience and the international products. Opening an additional account once your first one is in place requires only the filling in of a few fields. It takes just a few seconds.

One caveat: The bank’s brokerage fees are higher than average, especially after all the discounting throughout the industry earlier this year.

Domestic stock transactions are $10 per trade for up to 2,000 shares. Larger trades run an additional one cent per share. Options fees are also high–a base rate of $14.95 for online transactions, plus $1 to $1.50 per contract. Mutual funds can be purchased only with the help of a live broker, for $25 per trade.

Would I move all of my accounts here? I doubt it. This isn’t a site that will be useful for an active trader, especially one interested in options. I find the World Markets offerings intriguing, however, as a place to park excess cash in non-dollar investments.

The bank’s account-consolidation feature can be helpful, as well. I’ve been testing Mint ( for a couple of months and have some quibbles with the way it presents its reports. EverBank’s Financial Manager is more easily customized. 

Published in Barron’s, July 12, 2010

Posted by twcarey on 07/17 at 12:53 AM
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Saturday, July 03, 2010

Merrill Plays Defense Online

The big brokerage firm upgrades Bank of America system and tries to hold on to electronic trading clients.

MERRILL LYNCH WHICH WAS ACQUIRED by Bank of America in early 2009, is putting its stamp on the banking giant’s online brokerage. 

Merrill Edge ( opened its virtual doors on June 21, and essentially replaces BofA’s existing online offering. The plan to convert the bank’s online brokerage to Merrill Edge was announced in late February. (If you try going into BofA’s brokerage via, you’re now redirected to the Merrill Edge site.)

During the site’s introduction in February, Sally Krawcheck BofA’s head of wealth management, said that it would be aimed at “those clients who today have ‘play money’ at one of the online brokers.” The “play-money” concept was certainly true in the late 1990s, but today, online brokers such as Fidelity and Charles Schwab, can snatch entire accounts from full-service brokers. That trend accelerated in late 2008, amid the credit crisis.

Merrill Edge appears to be an attempt to hang on to those full-service clients, who may trade online elsewhere. However, the service will only be extended to Merrill customers on request. BofA brokerage clients have been automatically converted to Merrill Edge.

The main benefit for BofA (ticker: BAC) clients is online access to some Merrill research. Otherwise, the site doesn’t offer much that’s new beyond the rebranding and a fresh coat of paint. Merrill Edge boasts on the site that it already has 1.16 million customers with $48 billion in assets, which averages out to $41,400 per customer. That’s less than the December 2009 average that E*Trade and Schwab reported for our annual online broker review; it’s slightly more than TDAmeritrade.

Merrill Edge extends BofA’s “free” trades (30 per month) for customers with more than $25,000 in assets. Those who don’t qualify, or who trade more than 30 times per month, will be subject to fees that vary with account size. The price breaks start with accounts of $250,000 and up. Commissions for online trading range from $4.95 to $8.95 per stock trade. Broker-assisted trades are $50 to $75 for stocks and exchange-traded funds. Margin rates are currently 7.5% for a $50,000 debit balance.

soon. Starting with stock purchased in 2011, your broker will be required to report the cost basis—as well as the proceeds—of your closed positions to the Internal Revenue Service. The main purpose is to cut down on underpayment of capital-gains taxes. While the IRS will, presumably, collect more from taxpayers who are forced to be honest, financial-services firms are investing large amounts of money to try to provide accurate reports.

Cameron Routh, senior vice president of Scivantage, the publisher of performance-reporting system Maxit, says the main problem for retail investors will be collating transactions made at several different brokers. Routh says that the average number of online-brokerage accounts per trader is 2½, which means that most investors will be dealing with reports from several brokers.

One related trouble spot is wash sales. A wash sale occurs when shares of a particular security are sold at a loss and a substantially identical security is purchased within 30 days. It doesn’t matter whether the sale or purchase happens first, so long as there’s a 61-day window.

Let’s say you sell a stock from your E*Trade account on June 1, then buy a “substantially identical” one in your TD Ameritrade account on June 10. The IRS doesn’t care where the transactions took place. Under the law, you must report the wash sale accurately when you prepare your Schedule D. We’ll be checking tax programs to make sure they can handle transactions done in different venues.

NEW TOOLS: ZECCO ( recently rolled out its Zap Trade tool, which lets you have an open Zecco order ticket while you peruse other financial sites. Zap Trade is a browser plug-in. It currently works only with Firefox, although Zecco plans to introduce versions for other popular browsers.

Zap Trade scans and prefills an order ticket, while you browse compatible financial and investing Websites. It works with Bloomberg, CNN Money, Google Finance, Yahoo! Finance, MSN Money, Reuters, MarketWatch, the Motley Fool, and The Street. It’s also active in the public-research areas of E*Trade, Scottrade, and TD Ameritrade.

You can trade stocks and ETFs with Zap Trade. Trades of mutual funds, options, and other products haven’t yet been enabled. Zecco’s usual commissions apply, although use of the plug-in is free. 

Published in Barron’s, June 28, 2010. 

Posted by twcarey on 07/03 at 05:00 PM
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