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GameStop Stock (GME): Lenders’ Most Profitable Stock In Q3

GameStop was the top equity earner within the securities lending space this Q3. Here’s why that matters.
  • The U.S. securities lending market grew considerably this year. An increase in average fees, due to high demand for meme stocks, was a big driver of growth.
  • GameStop stock currently sports very elevated borrow fees, which indicates that there is a lot of short interest.
Figure 1: GameStop Stock (GME): Lenders’ Most Profitable Stock In Q3

Figure 1: GameStop Stock (GME): Lenders’ Most Profitable Stock In Q3

(Read more from Wall Street Memes: Here Is the Only Wall Street Analyst "Not Bearish" on GameStop Stock)

A Bit of Context

The securities lending market involves the lending of certain securities to institutional investors - usually banks and broker-dealers. This practice requires the borrower to provide collateral in the form of cash or security.

This process allows broker-dealers and investors to participate in activities such as market-making, short-selling, and more.

According to the SEC, securities lending and borrowing are considered integral to overall market structures and help many mutual funds and pension funds generate additional revenues.

Securities Lending Latest Data

EquiLend Data & Analytics recently provided a report on global securities lending activity during Q3. According to the firm, in 2022 thus far, the securities lending market has generated $7.45 billion. That represents an 8% YoY increase.

Drilling down into Q3, we find that securities lending generated $2.63 billion, which represents a 12% YoY increase. Of that amount, about $1.3 billion - nearly half - came from North American equities. That $1.3 billion equates to a robust 35% YoY increase; experts attribute this growth to a surge in average fees, which have grown 37% over the same period.

EquiLend’s report further points out that several asset classes played key roles within an increasingly volatile market. Recessionary concerns and pessimism over a high-inflation, high-interest rate environment spurred increased shorting activities.

The lending team at Brown Brothers Harriman & Co. (BBH), one of the largest private investment banks, provided a big-picture market assessment for the second half of 2022.

They claim that due to this year's "untested and unfamiliar" macro environment, investors are looking to refocus on market fundamentals. Short selling, meanwhile, has been increasingly used as a hedge against market downturns, with fundamentally overvalued meme stocks being a common target.

"This generated some positive momentum creating a depth in the hard-to-borrow market in the U.S. Most notably the demand concentrated on the "Meme Stocks", such as AMC Entertainment and GameStop, which continued to attract attention and command high fees." - as per the assessment of the BBH securities lending team.

GameStop As The Top Equity Earner

The securities lending industry's strong Q3 revenue growth in North America was closely tied to growth in several key sectors, such as consumer discretionary, communication services, and consumer staples.

Within consumer discretionary, which GameStop  (GME) - Get Free Report and Lucid Motors  (LCID) - Get Free Report are part of, saw 80% growth in their lending revenues. The former was the top equity earner, generating revenues totaling $102,591,665.

Keep in mind, this number corresponds to the fees collected by intermediaries, not the total value of shares lent.

Figure 2: America's top equity earners.

Figure 2: America's top equity earners.

Within the communication and entertainment services sector, AMC Entertainment  (AMC) - Get Free Report and Sirius XM  (SIRI) - Get Free Report saw triple-digit revenue increases. Also of note, the consumer staples sector, saw a stunning YoY increase of almost 300%, headed by Beyond Meat   (BYND) - Get Free Report.

GME's Cost To Borrow

The cost of borrowing a stock varies based on the laws of supply and demand. Among the influencing factors are utilization (the number of shares available to sell short), liquidity, and volatility.

Thus, it follows that high borrowing rates indicate a high demand to short a stock, and vice versa. Generally, average borrow rates fall between 0.3% and 3% per year.

However, if a particular stock is heavily shorted, it is not uncommon to see fees above 20% or much higher.

Currently, GameStop's borrow fees are at 9.3% per year. According to data provided by Interactive Brokers, GME’s borrow fees have hovered at that level for much of October.

Figure 3: GameStop's borrowed shares.

Figure 3: GameStop's borrowed shares.

At other points this year, GameStop's borrowing fees have been much higher. Until early August, for example, GameStop's stock borrow rates stood at an annualized percentage of 32.5%. At the end of May, for example, they spiked to an eye-popping 110%.

High borrow fees make shorting a stock more expensive and put extra pressure on short sellers. And even though GameStop's current borrow fees are below the sky-high levels seen earlier this year, a 9.3% annualized fee is still significant. 

(Disclaimers: this is not investment advice. The author may be long one or more stocks mentioned in this report. Also, the article may contain affiliate links. These partnerships do not influence editorial content. Thanks for supporting the Wall Street Memes)