What Is Easy-To-Borrow List?
An easy-to-borrow list is a record that a brokerage updates on a daily basis and is comprised of extremely liquid securities that are readily available, thus assuring delivery, to investors seeking to engage in short sale transactions.
The easy-to-borrow list can be contrasted with the hard-to-borrow list, which indicates those shares that are not readily available for short selling.
- An easy-to-borrow list is comprised of extremely liquid securities that are readily available, thus assuring delivery, to investors seeking to engage in short selling transactions.
- Securities that are on the easy-to-borrow list, in addition to being easier to short, usually have lower transaction costs.
- Hard-to-borrow shares, in contrast, are difficult to locate for short sellers and if loaned will carry higher costs to transact.
Understanding Easy-To-Borrow List
In order to sell short a stock, a customer must first locate and borrow existing shares in order to sell them—with the hope of making a profit by buying them back at a lower price. In other words, you cannot sell short shares out of thin air. Brokers must locate shares on behalf of interest shorts and lend them. While they are loaned out, the short seller pays interest on the loan via a margin account. Whether or not a stock is easy to borrow will affect those interest charges, with harder to borrow stocks demanding a higher rate. Easy to borrow stocks, on the other hand, are less costly to short.
The easy-to-borrow list is updated every 24 hours. It gives investors and brokerage firms the ability to transact short sales more readily, as they aren't required to research the availability of a stock every time it is requested for a short sale transaction. Instead, they can assume that stocks on the list are readily available. Appearing to this list usually means that a company's shares are highly liquid and/or there are a sufficiently high number of outstanding shares, or float.
Easy vs. Hard to Borrow
In contrast to the easy-to-borrow list, brokers will also maintain a hard-to-borrow list. These securities are naturally more challenging to borrow for short sale motivations. Often, a security may be on the hard-to-borrow list because it is in short supply or because of the stock's volatile price.
Compared to securities on an easy-to-borrow list, hard-to-borrow securities almost always come with more fees for access to the securities.
The easy-to-borrow list offers no information as to whether a security is over- or underpriced, as opposed to other recommendation lists that brokers keep, but rather, it's a measure of anticipated liquidity, or availability, for potential short sellers. Securities that are on the easy-to-borrow list, in addition to being easier to short, usually have lower transaction costs.
Brokerage houses with a deeper lineup or menu of services will often have a more extensive list of securities that are easy to borrow. Naturally, institutional investors, such as hedge funds, often seek near-immediate access to short sale opportunities, given the small window that is available for them to initiate their transaction.