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How are hard-to-borrow fees calculated?

What we'll cover

  • What a hard-to-borrow fee is

  • How these fees could impact your trading strategy 

  • How to calculate hard-to-borrow fees

You’ve probably heard the trading adage of “buy low and sell high” or, in other words, buying when stocks have fallen to a low price and selling them at a higher price. That’s not always the strategy a trader will use, though. For instance, short sellers do the exact opposite. They sell high and buy the stock back after the price drops to profit off the difference.

Traders might also use margin.  Margin trading  means borrowing money from the brokerage company and using that money to buy stocks. In other words, taking out a loan to buy securities and repaying the loan (usually with interest) back to the broker later.

When it comes to short selling, things can get a little complicated, especially when there’s a limited number of shares available — that’s where hard-to-borrow fees come in.

What does hard-to-borrow mean?

When you short sell a stock, you sell something you don’t own and take a negative position. However, sometimes traders hold too many shares of stock held short. In that case, brokers can put the stock on a hard-to-borrow list. This means there’s a reduced number of “shortable” shares in the market. However, when it’s actually possible, your broker will assure you that it can borrow the required shares, which is called “getting locate.”

What is a hard-to-borrow fee?

A hard-to-borrow fee is an annualized fee based on the value of a short position and the hard-to-borrow rate for that position. The fee is charged on a prorated basis depending on how many days you hold the position short.

You’ll generally see the fee assessed to your account at the end of the month or upon settlement of the closing trade. If you open and close a short stock position intraday (meaning not held overnight), you will not be subject to a hard-to-borrow fee.

This begs the question: When would you need to calculate it?

When shorting a stock, your broker will use its own inventory or borrow from the margin account of another client or even another brokerage firm. If the stock you are shorting is a popular stock to sell short and the demand has depleted the stock inventory within the firm (or firms), this is an instance that may create a “hard to borrow” situation. If a stock is determined to be hard to borrow you may be asked to pay interest and fees on the shares that you would like to sell short. The higher the demand for borrowed stock shares to sell short the higher the fees will be.

You may want to calculate this on your own, so you know exactly what you’re paying for hard-to-borrow fees. There’s a lot to take into consideration, especially since the broker must actively search for shares, and you may even see higher margin requirements and margin interest rates.

Hard-to-borrow fee calculation and components

Let’s walk through an example of how the hard-to-borrow fee calculation works. But first, what’s the actual calculation?

The step-by-step hard-to-borrow fee calculation looks like this:

1. (Market price of stock) x (1.02) = Per Share Collateral Amount

2. Next, you take the per share collateral amount and use it in another calculation: (Per Share Collateral Amount) x (Share Quantity) = Trade Value

3. Next, multiply the trade value by the annual hard-to-borrow rate: (Trade Value) x (Annual Hard-to-Borrow Rate) = Annual Hard-to-Borrow Fee

4. Finally, divide the annual fee by 360 days to get the daily hard-to-borrow fee: (Annual Hard-to-Borrow Fee) / 365 = Daily Hard-to-Borrow Fee

Next, let’s look at an example.

Hard-to-borrow fee calculation example. Let’s say you’re short selling 10,000 shares of a stock that trades for $11 a share. The security is on the hard-to-borrow list, so you’re going to have to pay a fee. The hard-to-borrow rate is 5%, and the current industry conversion is 1.02 (although that’s subject to change). How much will the trade cost? Following the steps in the text above, with this example, step 1 is $11 times 1.02 equals $11.22. Step 2 is $11.22 times 10,000 equals $112,200. Step 3 is $112,000 times 0.05 equals $5,610. Step 4, the final step, is $5,610 divided by 365 equals $15.37.

Learn how to calculate hard-to-borrow fees

As a trader, you might be tempted to skim over details about things like hard-to-borrow fees, but it’s important to understand them because you’re the one who will be paying more. It’s almost always more costly to borrow stocks on the hard-to-borrow list compared to the easy-to-borrow list — but with information about these fees readily available, it’s worth it to learn all you can.

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