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Is Your Retirement Fund Leaving Money on the Table?
The answer can be found in the opaque market of securities lending.
- By
- October 29, 2025
- CBR - Finance
The securities lending market is a relatively opaque section of the financial markets, less transparent than the municipal and corporate bond markets. It’s the domain of institutions that lend securities to short-sellers betting that prices will fall—and the ire that is periodically directed at short-sellers can prompt additional scrutiny of securities lending.
In the past five years, in response to regulations, participants in this market have disclosed more information than before. Chicago Booth’s Taisiya Sikorskaya dug into that data, finding that institutions are at times deciding not to lend out securities to short-sellers, despite the potential money to be made.
“This new transparency opens up a lot of questions, including how much money is being left on the table and why,” says Sikorskaya. “These new data from regulators allow us to make some progress on these questions.”
The idea of investors profiting if a company’s stock price falls can rub people the wrong way, and some retail traders have positioned themselves as bullish heroes battling the hedge funds holding short positions in stocks such as GameStop. But academics generally view short selling as an important part of how markets work, with contrarian views contributing to price discovery and market efficiency.
To sell short, a trader has to first borrow a stock from its owner. That long investor will generally provide shares, through a prime broker, for a price. Many stocks are held by large institutions, which, according to the conventional wisdom, are well positioned to encourage and enable securities lending.
More of the financial market has become linked to benchmark indexes that weight stocks by market capitalization, and Sikorskaya wondered how this was affecting securities lending. To find out, she employed benchmarking intensity (BMI), a metric she developed with London Business School’s Anna Pavlova. She also looked at the annual rebalancing decisions made by FTSE Russell, a global index provider, then built a model that explains how index weights affect borrowing prices.
Each June, FTSE Russell moves US stocks in and out of indexes on the basis of market capitalization. A stock may fall from the large-cap Russell 1000 to the small-cap Russell 2000. When that happens, because there is more capital benchmarked to the Russell 2000, investors will buy the stock.
Sikorskaya finds that between 2006 and 2018, a stock that dropped to the Russell 2000 saw its BMI metric rise nearly 9 percentage points, on average. As a stock’s BMI rises, so does its lending supply, which, in theory, should make it cheaper for short-sellers to borrow those stocks.
Yet that’s not what she finds in the data. When stocks that were hard to borrow were added to the Russell 2000, it became 25 percent more expensive to short them. By her calculations, a 1 percentage point rise in institutional ownership led to a 77 basis point increase in borrowing fees for these stocks.
How an index affects lending
There may have been more demand from shorts for those stocks; but also, even though regulation allows funds to lend out a third of their total assets, big money managers such as BlackRock, Fidelity, and Vanguard often impose their own stock-level lending limits, Sikorskaya says. There are many stocks they will hardly lend out at all, even if short-sellers are eager to borrow them. “For example, I see that 40 percent of hard-to-borrow additions to the Russell 2000 Index were not lent out after the reconstitution,” she says.
It is hard to quantify how much money managers are leaving on the table, or why they’re making that decision. “The securities lending market is so important, but we don’t always know what’s happening on the sell side. We may not know who holds those large positions or even how much it costs to sell short in real time,” she says.
What is clear, however, is that the lending limits should affect market efficiency. The research findings suggest that as a security becomes more expensive to borrow, some short-sellers alter their decision-making. Marginal short-sellers, in particular, may choose to forgo trades that involve high borrowing costs and instead focus on stocks that cost less to borrow.
For further evidence of the mechanism in the model, Sikorskaya looked to Japan, where the central bank purchased exchange-traded funds between 2010 and 2022. She finds a similar dynamic: When the Bank of Japan made purchases, certain stocks—the ones in which the Bank of Japan made the largest unexpected purchases—saw an increase in lending supply, shorting demand, and borrowing fees.
The findings highlight the need for continued and further transparency in the securities lending market, as well as in other settings that involve mandate-driven rebalancing, Sikorskaya writes.
She notes that the same forces she observed will likely be in play if and when climate-initiative mandates and benchmarking encourage more purchases of sustainable investments or discourage purchases of polluters’ stocks. A restriction on lending could end up affecting short-sellers, market efficiency, and the institutions’ own investors.
- Anna Pavlova and Taisiya Sikorskaya, “Benchmarking Intensity,” Review of Financial Studies, March 2023.
- Taisiya Sikorskaya, “Institutional Investor Mandates, Securities Lending, and Short-Selling Constraints,” Working paper, September 2025.
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