Risk of securities lending

(1) Unequal risk and return

The imbalance between risk and return is the inherent risk of shorting. Theoretically, when an investor trades one more stock, the maximum loss is when the stock price drops to 0, that is, the loss ratio is 100%; but when an investor shorts a stock, there is no limit to the subsequent rise in the stock price relative to the price of shorting, so the potential loss is unlimited, which may be 200%, 300% or even higher.

(2) Time cost

Short selling must consider time factors. On the one hand, because short selling generates interest every day, the accumulated cost increases over time; on the other hand, the greatest uncertainty of short selling also comes from time. If investors hold short positions for a long time, they may face the risk of stock price increases.

(3) Interest rate risk

It should be noted that after placing a short order, the short interest rate will still change. The final interest paid by investors will be calculated based on the actual daily interest rate from the same day and calculated at 23:00 in the market (23:00 in US time for US stocks and 23:00 in Hong Kong time for Hong Kong stocks). The margin financing interest will be deducted from the cash balance of your stock account.

No one can determine the shorting interest rate in advance. If the crowding of individual stock shorts increases significantly during the shorting period, leading to a significant increase in interest rates, investors need to bear the increased shorting costs, resulting in losses due to the shorting interest being greater than the shorting profit.

(4) Recall and Qiangping

When shorting, the relationship between short investors and lenders is unequal. Stock lenders/lenders have the right to request a recall of the stock at any time. If a recall occurs, the brokerage firm will attempt to replace the previously borrowed stock with the stock borrowed from another lender. If the stock cannot be borrowed, a formal recall will be initiated. Recalls usually use Volume Weighted Average Price (VWAP) orders to close the client's short position.

In addition, if the stock price continues to rise after borrowing the stock, the margin requirement for the stock will also continue to increase. Once the margin is insufficient, it will trigger a forced liquidation. If a stock with a high proportion of short positions rises sharply, it is likely to cause many short investors to rush to position squaring during the same period of time, leading to further price increases.

(5) Corporate action

Certain corporate actions (such as mergers and acquisitions, dividends, etc.) may cause an increase in short selling fees.

For example, when a company announces dividends, it usually results in a decrease in the supply of stocks in the market, which may lead to an increase in margin lending rates.

(6) Delisting and delisting ·

When a stock is delisted or delisted, investors may not be able to fill their short positions due to the inability to trade the stock. They need to wait until the stock is delisted or the stock resumes trading before terminating. This process may last for several days, months, or even longer, especially when the company goes bankrupt and liquidates. During this period, investors have to continue to pay margin trading fees based on the delisting price of the stock or the Closing Price of the most recent trading day, which may be very high.