The S&P 500 Index returned 50% over the past two years as euphoria over the transformative power of AI drove stock prices higher. That is reminiscent of the stock rally of 1998 to 1999 which was propelled by the rise of the internet. Our hope is that 2025 will not remind us of the year 2000, which started a three-year-long bear market.
Many articles carried the theme of “nobody wants to be short anymore.” That has not been the securities lending desk’s experience at IBKR. Many clients hedge their directional single-stock or options exposure with ETF’s. And the more they buy, the more they sell short to maintain their hedge ratios. They are still being paid short credit interest, but with the decrease in the Fed’s target rate, that interest is now 1% lower.
Then there are speculators who follow “interesting” stories and trade rollercoasters. Some of the most popular shorts for these clients in 2024 were:
| Issuer | 52-week High | 52-week Low | Difference between High and Low | Closing Price 12/27/24 |
| Trump Media & Technology Group (DJT) | $79.38 | $11.75 | -85% | $36.08 |
| Lucid Group (LCID) | $4.43 | $1.93 | -56% | $3.20 |
| Vinfast Auto (VFS) | $8.78 | $2.26 | -74% | $4.32 |
| Canopy Growth (CGC) | $14.92 | $2.66 | -82% | $2.78 |
| Beyond Meat (BYND) | $12.12 | $3.30 | -73% | $4.08 |
When we look back upon each trading year, we reflect on seminal events which required the most of our time. They occurred in the second quarter this year.
1. Volatility Monday
There is an old Wall Street proverb: “Hedge when you can, not when you have to.” We were reminded of it on what we like to call “Volatility Monday.” On August 5th, The Cboe Volatility Index (VIX) jumped from 23 to 39, the largest increase since Covid and Volmageddon in 2018. The Nasdaq 100 Index dropped almost 3%.
It was not a good day for short volatility strategies. We know of at least one hedge fund which ceased operations. Large market moves make for active days in trading departments. The lending desk monitors and fulfills intraday requests to continue supporting clients’ trading activity. The risks of shorting become more acute and extra vigilance is required of desk staff to manage them effectively.
2. The Election
The winner of an election is seldom evident before the night of the election. The market is used to that. But it dislikes uncertainty of whether someone will actually be declared the winner on election day. The 2000 election between Democrat Al Gore and Republican George W. Bush is an example. No clear winner emerged. The day after the election, the S&P 500 Index dropped 2.20%. By contrast, it returned +2.61% twenty-four years later and kept running. That was not only due to the perception that Republican Donald Trump would be business-friendly. We believe that the market’s spirits were being dampened by anxiety over an unclear outcome. The removal of that possibility released those spirits. We suspect that had Democrat Kamala Harris won with similar data points, the market would have taken it well.
3. Year-End Financing
Staff which deal specifically with client financing do not take vacations in December. Many prime brokers ask their clients to “take off balances” a.k.a. “pay back the margin loan” by December 31st. Banks’ reporting is based on figures from December 31st, and it is advantageous for them to lower the amount of money they lend to their clients because it will improve their liquidity ratios. This affects hedge funds and other dealers the most. Some ways to lower balances are to simply move the entire margin loan (and associated assets) to another broker such as IBKR, replace the exposure with options or futures and to sell SPX boxes to lower the debit balance. The lack of cash supply causes new providers of financing (such as the options market) to charge higher implied interest rates. Interest rate spreads over the Secured Overnight Funding Rate (SOFR) benchmark were the highest we had seen in years.
We believe that a few reasons1 contributed besides the usual balance sheet “dressing-up.” In summary, buying begot buying.
- Momentum players started purchasing a massive amount of SPX Index futures after the election.
- Volatility players were buying single stocks, especially NVIDIA Corp. (NVDA), which commanded the highest financing rates.
- The December-to-March E-mini S&P 500 futures roll was heavily bid.
New Features
We are always thinking of ways to improve the client experience at IBKR.
As the securities lending desk finishes out 2024 and makes to-do lists for 2025, we wish you good tidings and a PortfolioAnalyst graph of “up and to the right.”
1 Not specific to IBKR clients.
Disclosure: Interactive Brokers
The analysis in this material is provided for information only and is not and should not be construed as an offer to sell or the solicitation of an offer to buy any security. To the extent that this material discusses general market activity, industry or sector trends or other broad-based economic or political conditions, it should not be construed as research or investment advice. To the extent that it includes references to specific securities, commodities, currencies, or other instruments, those references do not constitute a recommendation by IBKR to buy, sell or hold such investments. This material does not and is not intended to take into account the particular financial conditions, investment objectives or requirements of individual customers. Before acting on this material, you should consider whether it is suitable for your particular circumstances and, as necessary, seek professional advice.
The views and opinions expressed herein are those of the author and do not necessarily reflect the views of Interactive Brokers, its affiliates, or its employees.
Disclosure: ETFs
Any discussion or mention of an ETF is not to be construed as recommendation, promotion or solicitation. All investors should review and consider associated investment risks, charges and expenses of the investment company or fund prior to investing. Before acting on this material, you should consider whether it is suitable for your particular circumstances and, as necessary, seek professional advice.
Disclosure: Short Selling
Short selling is an advanced trading strategy involving potentially unlimited risks and must be done in a margin account.
Disclosure: Margin Trading
Trading on margin is only for experienced investors with high risk tolerance. You may lose more than your initial investment. For additional information regarding margin loan rates, see ibkr.com/interest
