Hard-To-Borrow Fees
There may be a wrinkle for anyone crazy enough to short sell a leveraged ETF depending on which broker you use: the “hard to borrow” fee. This is a fee that is levied on top of any interest charged on borrowed securities (borrowed from inventory so that you can short them). For example, while Interactive Brokers will allow you to short FAS (Direxion Daily Financial 3x Bull Shares) and charge you 1.68% in interest, it will also levy a hard-to-borrow fee which as of May 25th, 2009 stood at 23.81%!
Where does this magical fee come from? The rationale is that the prime broker has to spend a lot of time sourcing the stock to be shorted (they need to put it in their own inventory), and if it is hard to find, it becomes “hard to borrow” for you.
How do you calculate what the hard to borrow fee is? I don’t think you can. I believe each firm has their own pricing model, and all you can do is get a quote before making your short on a hard to borrow stock (your brokerage will have a list, similar to how they will have a list of short-eligible stocks in inventory).
I’m calling around to find out how ubiquitous this practice is amongst some of the other brokers, I’ll keep you posted…
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Ok, so what does DSC stand for? 
Thanks for the link. 
And... feel good about what you're doing by donating to charity! 
Preet
Thanks for the mention. Glad to know the blog helped inspire your book idea. Was it the post on the ...
Thanks for the mention Preet! 
Thanks for the link Preet! 
I still like my shock collar idea more, thanks for the mention. 
Only two books in the next year? Are you getting old? :-)
Thanks for the mention. 
Thanks a lot for the link! 
Great advice! I think that you will also like this article, called "The Power of Purging". I read ...
Comment by Ink-Stained Gorilla on 26 May 2009:
Preet,
I think the lender did the math on the shorting scheme. To me this seems to validate your thoughts about shorting in a volatile market.
Sadly this all seems reminiscent of the types of practices you see with a sports betting operation….
Comment by Michael James on 27 May 2009:
I’d be interested in learning more about the fees involved in shorting. The one time I was short stock, I was charged “INT FR” at 9.75% at a time when positive cash balances were paid 5% interest. In trying to parse “INT FR”, I’m guessing that “INT” is interest, but I have no guess for “FR”.
Comment by Preet on 27 May 2009:
@Michael James: FR usually means “from” followed by the date you shorted, and then ends with THRU meaning “through”, followed by the date you closed your short. THRU may not appear if you have not covered your position, but sometimes it will still appear to be the end of the reporting period. Any chance you remember if there was a date on that line of your statement? That might confirm it…
Questrade has no hard-to-borrow fees, just interest on debit positions which is prime + 1.5%, or 3.75% right now. The spread is still a big money maker, no matter what.
Comment by Michael James on 27 May 2009:
Thanks for the explanation. The “FR” did precede a date.
If charging this “interest” for short positions is typical, then it makes no sense for retail investors to ever short anything where the expected returns are over a period of months or more.
Comment by Preet on 27 May 2009:
@Michael James – I agree, the hurdle becomes that much higher for break even. The short proceeds could be put into a GIC to reduce the height of that hurdle, but it will still exist. There will never be a situation (for long anyways) where the interest charged to a retail investor would be lower than what they can earn.
Hmmm… want to start up a securities lending shop with me?
Pingback by Canadian Personal Finance Blog » Blog Archive » Random Thoughts: $50 Billion is a lot of money on 29 May 2009:
[...] Preet at Where Does All My Money Go, points out there are hidden fees everywhere in Hard to Borrow Fees. [...]
Comment by Holly on 7 October 2009:
Thanks Preet for this subject. Recertly I had nightmare with Zecco who claim free trading but with huge hidden charges. They charged me this hard to borrow fee $5/day almost EVERYDAY even after I covered!!! And very insane is that I was shorting the same stock NTAP from Scottrade at the same time, yet Scottrade didn’t charge me once with this so called HTB fee. So I don’t understand why NTAP is HTB for Zecco and why got charged everyday? isn’t this something wrong?
Comment by JohnnyH on 26 January 2010:
Hilarious! Where did you find this fee at Preet? I use IB as well. Do they keep a table somewhere?
I would have expected a little better from IB…
Comment by Preet on 27 January 2010:
@JohnnyH – I called IB directly and they pointed to a page on their site which lists the current rates. With some searching you should be able to find it (rates change constantly – probably related to implied volatility)