How does a share travel from a pension fund to a short seller?
A short seller sees a rate and an availability flag on a screen. Behind that screen is a chain of five parties, and knowing the chain explains why borrow rates behave the way they do.
The five links
1. The beneficial owner. The pension fund, index fund or insurer that actually owns the shares. It sets a lending policy — what may be lent, how much, against what collateral — and then mostly forgets about it.
2. The agent lender. Usually the custodian bank already holding the assets: the large global custodians run lending programs as a service on top of custody. The agent finds demand, negotiates rates, manages collateral, handles marks and recalls, and typically provides borrower-default indemnification — it makes the owner whole if a borrower fails. The fee split favours the owner, commonly 70–85% to them.
3. The borrower of record. Not the hedge fund. A prime broker or broker-dealer borrows in its own name and takes the counterparty risk of the loan.
4. The prime broker's internal inventory. Before going outside, the prime broker looks in its own book — its margin customers' lendable shares and its own inventory. Internalising a borrow is the cheapest option available, which is why the same stock can carry different rates at different brokers on the same day.
5. The short seller. Sees only: available or not, and at what rate.
The locate, and why it is weaker than it sounds
Before accepting a short-sale order, a broker must have reasonable grounds to believe the security can be borrowed and delivered by settlement. That is the locate requirement, present in some form in every major market.
A locate is a reasonable expectation, not a struck loan. Availability lists are built at the start of the day from inventory that other people are also drawing on. A name that was easy to borrow at 9am can be unavailable by lunchtime. This gap — between "located" and "actually borrowed" — is where a large share of the operational drama in short selling lives.
Open versus term
Most stock loans are open: rolled over daily, callable by the lender at any moment, and — crucially — re-rated daily. The fee you pay today is not the fee you agreed when you opened the position. It is the fee the market cleared at this morning.
Term loans fix a rate for a fixed period and carry recall protection. They cost more, and they are scarcest in exactly the names where a borrower would most want one. A borrower who can obtain a term loan on a crowded short usually pays handsomely for it.
A worked illustration of the split
A fund lends $10 million of a stock at a 4.00% fee for a year, with an 80/20 split with its agent:
- Gross fee: $10,000,000 × 4.00% = $400,000
- To the beneficial owner: $320,000
- To the agent lender: $80,000
Meanwhile the short seller pays the full 4.00%, and the prime broker sits in the middle earning a spread of its own on top. Every link in the chain is compensated, and all of it comes out of the borrower's daily accrual.
Try it now
- Open the Annual Comprehensive Financial Report of CalPERS, the California public employees' pension fund, published each year on calpers.ca.gov, and find who its custodian is.
- Search the report for "securities lending" — most disclose the program, the collateral policy and the revenue split.
- Note whether the fund lends against cash or non-cash collateral. That single choice changes the entire economics, which is the subject of the next lesson.