Freetrade to start lending out customer shares to increase revenue

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Commission-free share dealing platform, Freetrade, is venturing into the world of stock lending, a move that it says will help to support its low-cost trading and investing operations.

Freetrade prepares the ground for a move into stock lending

Freetrade has written to its customers introducing new terms and conditions which include a section notifying clients that the broker, will in future be lending their stock in the securities finance market.

Freetrade users will have to decide whether to agree to the new T&Cs or choose to opt out by the 1st of June.

Those customers who choose not to accept the new T&Cs will no longer be able to make stock purchases via Freetrade after that date, however, they will be able to hold onto their existing positions and sell them in the ordinary way, as and when they wish to.

What is stock lending?

Stock lending or stock loan is a well-established market practice that aids liquidity and creates an income for investors, typically institutions such as insurers, pensions funds and fund managers.

Market makers and other institutional traders use the stock loan market to facilitate short positions, allowing them to make two way (bid-offer) prices or short sell a stock without having to own that stock beforehand.

If a trader finds themselves short of a particular stock ahead of settlement day they can, in most circumstances, borrow that stock from an institution for a fee, usually a rate of interest over a benchmark such as LIBOR or SONIA, or a foreign currency equivalent for the period of the loan.

The borrowed stock is delivered into the market to settle the trader’s short sales, he or she remains effectively remains short of the stock, financing the stock loan until they choose to buy back their short, and return the borrowed stock to the lender.

It’s worth noting that stock lending helped to create and still supports the equity CFD market in the UK, and elsewhere.

How will stock lending operate at Freetrade?

Freetrade will aggregate its client’s holdings and make these available for institutions to borrow. Freetrade says it will only be lending stocks to investment banks, who will pledge collateral with the broker in return.

The value of that collateral, which will take the form of cash or government bonds, will be greater than the value of any stock borrowed, Aad will be subject to variation margin, as and when it’s required.

Freetrade hopes that the venture into stock lending will create a diversified income stream for the business, which will allow them to keep their charges to customers low, and following their most recent fundraising round they are now sufficiently capitalised to be able to participate.

What does this mean for Freetrade customers?

Freetrade users shouldn’t notice any difference in the day to day operation of their account and if they own stock that happens to be on loan they can still sell that holding and will receive the proceeds in the usual way on settlement day.

Freetrade customers won’t derive any income from stock lending even if their stock is leant out, instead that will be kept by Freetrade themselves.

However, the company is considering how it might introduce a stock loan revenue-sharing scheme for its premium customers, though this will not be introduced at the outset.

Speaking about the move into stock lending a Freetrade spokesperson said that:

“At Freetrade, our mission is to get everyone investing, by offering a low-cost and simple product. In line with our goal to build a sustainable business, securities lending will provide Freetrade with a new and stable revenue stream, allowing us to keep our fees low, and to continue to improve our product and services as we scale”.

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