Street Smart

Stock lending and short selling: where the borrowed shares come from

Most investors who buy a share and hold it for years never imagine that same share being handed to someone who is betting the price

By James Beddington · July 6, 2026

Image: m. / Unsplash

Most investors who buy a share and hold it for years never imagine that same share being handed to someone who is betting the price will fall. That handoff is the business of securities lending, the quiet plumbing that sits behind almost every short trade on a public exchange. This stock lending short selling guide shows who actually owns the lent shares, where the lending fee ends up, and what the arrangement does and does not mean for a long-term holder.

In this article

What the source says

The Street Smart Trader, Chapter 7, treats securities lending as the unglamorous backdrop to short selling. The chapter’s argument is straightforward. A short seller is contractually obliged to deliver shares to a buyer on settlement day, even though the short seller does not own any shares. To meet that obligation, the short seller has to borrow them first, usually from a large pool run by a custodian, a prime broker, or a specialist lending agent.

According to the chapter, the shares most often lent out are not the shares of thrill-seeking day traders. They are large, long-term holdings: pension funds, tracker funds, insurer portfolios, and the custodians that look after them. The chapter also stresses that lending is usually opt-in. The beneficial owner, meaning the pension fund or tracker fund whose clients ultimately bear the investment risk, has to agree that its custodian can lend the shares out at all. Where the chapter is quiet, however, is on the practical mechanics: how the chain of intermediaries splits the fee, how the short seller eventually returns the shares, and what the long-term holder sees on a statement.

What matters for readers

There are three reasons an ordinary investor should care about this plumbing. The first is money. A lending fee, paid by the short seller for the privilege of borrowing, is real income. Where that income ends up is partly a question of the fund’s prospectus and partly a question of negotiation with the lending agent. A reader knows that a fund labelled “fully paid lending” is different from a fund where the manager takes a large cut of the lending revenue.

The second reason is governance. Securities lending creates a situation where the long-term holder is exposed to the credit risk of the borrower, even if the economic risk of the share price still sits with the long-term holder. If the borrower fails to return the shares, the lending agent has to find replacements or pay cash compensation. The chapter notes that this is a real, if rare, risk, and that it is normally managed with collateral, usually cash or government bonds, posted by the borrower.

The third reason is disclosure. In the United Kingdom, the Financial Conduct Authority currently requires net short positions above 0.5 percent of a company’s share capital to be publicly disclosed, with further thresholds at 0.2 percent increments thereafter. That regime tells the reader who is short, but it does not tell the reader which long-term holder has supplied the borrowed shares. Knowing the direction of the bet is useful; knowing the supply side is a different question.

What is not proven yet

A few commonly repeated claims sit outside the chapter and outside what can be asserted as fact here. The size of the global securities lending market is widely quoted in the trillions of dollars, but figures vary by data provider and by what is counted, and the source notes do not pin down a single current number. The exact split of lending fees between beneficial owners, custodians, and lending agents is also variable, and any specific percentage used in marketing material should be treated as illustrative rather than universal.

It is also worth being clear on what short selling itself is not proven to do. The chapter treats short selling as a legitimate mechanism for price discovery, hedging, and, in the hands of abusive operators, a source of market distortion. The line between productive and unproductive shorting is contested in academic literature and in regulatory debate, and a piece of educational content should not pretend that line is settled.

Stock lending short selling: how to read it

The easiest way to picture securities lending is as a chain rather than a transaction. The reader can walk through the chain in six steps.

Step one: the beneficial owner. This is the pension fund, the index tracker, the insurer, or the large family office that actually owns the shares for the long term.

Step two: the custodian. The custodian holds the shares in safekeeping, keeps the register tidy, and is the entity with legal possession of the certificates or electronic entries.

Step three: the lending agent. Sometimes this is the custodian itself, sometimes a separate specialist such as a bank-run securities lending desk. The lending agent runs an inventory of available shares and matches requests from borrowers.

Step four: the borrower. This is usually a prime broker acting on behalf of a hedge fund, a market maker, or another institution that needs shares to deliver against a short sale. The reader can see how the chain connects to hedge funds and what they actually do, but it is worth noting that prime brokers and market makers are also regular borrowers, not only short-side hedge funds.

Step five: the fee. The borrower pays a lending fee, usually expressed as a percentage of the value of the shares, annualised. That fee is split according to the agreement between the beneficial owner, the lending agent, and sometimes a fund manager in the middle. In some structures, the beneficial owner keeps most of the fee. In others, particularly actively managed funds, the manager takes a meaningful share.

Step six: the return. The borrower eventually buys shares in the open market to close the short position and returns them to the lending agent, who passes them back to the custodian. The long-term holder’s beneficial ownership is undisturbed throughout, although small reconciliations of corporate actions, dividends, and voting rights have to be managed along the way.

A worked example helps. Imagine a fictional UK pension fund, Northbridge Pension Scheme, which holds 100,000 shares in a heavily shorted mid-cap retailer called Marlows plc. Northbridge’s custodian, working with a specialist lending agent, makes those shares available for lending. A short seller borrows 20,000 of them at an annualised fee of 2 percent of the value of the loan, equivalent to roughly £20,000 a year on a £1 million parcel, though the precise figure depends on the scarcity of the shares and the credit quality of the borrower. Northbridge’s agreement with its lending agent splits the fee 80/20 in the pension fund’s favour, so the scheme keeps £16,000 and the agent keeps £4,000. The short seller eventually covers the position by buying in the market, the shares are returned, and Northbridge’s holding is back to 100,000 shares, plus the lending income in its bank account. The economic risk of the share price, including the risk that the short seller was right, stayed with Northbridge the whole time.

What the long-term holder actually sees.

For a reader who holds units in a fund, the practical question is what shows up on a statement. The honest answer is often: very little. A typical UK fund factsheet does not break out securities lending revenue as a line item, although the annual report will usually discuss the lending programme, the revenue split, and the collateral arrangements. A reader who wants to know whether their fund lends out shares, and on what terms, can usually find the answer in three places: the prospectus, the annual report, and the SFDR or sustainability disclosures, where lending policies are sometimes described.

For a reader who holds shares directly, the picture is different. Direct shareholders do not normally lend out their shares unless they have signed up to a stock lending programme with their broker, which usually pays a small fee in exchange for the broker retaining the right to lend the shares. Most retail platforms do not offer this by default, and many retail investors never opt in. The reader knows that the typical retail shareholding is not what funds the bulk of short selling.

One further point deserves care. Securities lending and short selling are related but not the same thing. A borrower’s reason for taking the shares can be a short sale, but it can also be a market-making obligation, a derivatives hedge, or a settlement fail that needs to be covered. Reading every lent share as a share that is being used to bet against the company is a misreading of the market.

Risks the chapter underplays.

The chapter is more interested in how the lending chain operates than in where it can fail, so the reader can usefully add a few checks. The first is collateral quality. Cash collateral is usually reinvested in money market funds or short-dated government bonds. The reinvestment policy is not risk-free, and a reader can ask what the lending agent is allowed to do with the cash it holds.

The second is recall risk. If the lender recalls the shares, the borrower has to find replacements in a tighter market, which can push the fee up sharply. This matters more for the borrower than for the long-term holder, but it does mean that lending programmes are not always smooth running.

The third is voting rights. When shares are lent out, the borrower usually gets the voting rights, not the long-term holder. The practical impact for a typical pension fund is small, but for a contested corporate vote it can be material. The reader can check the fund’s policy on recalling lent shares ahead of a vote.

What to check next.

For a reader who wants to take this further, four checks are sensible. First, identify the funds you hold and search the latest annual report for “securities lending”. Second, note the revenue split and the collateral arrangements. Third, if you hold shares directly, check whether your broker offers a stock lending programme and what the fee schedule looks like. Fourth, for a stock you are watching, look at the FCA short selling disclosure register to see who has disclosed a net short position above the 0.5 percent threshold. None of this is a recommendation, but it gives the reader a clearer picture of who is on each side of the trade.

The reader knows, after working through this guide, that the short seller is not conjuring shares out of thin air. The shares have to come from somewhere, and in most cases they come from the holdings of long-term institutional investors, working through a chain of custodians and lending agents, in return for a fee. That fee is real, the credit risk is real, and the disclosure regime tells only part of the story. Understanding the plumbing does not make short selling good or bad. It does, however, make the reader harder to surprise.

This piece is education only, not financial or investment advice. Investments can fall as well as rise, and any decision based on this article should be checked against current, sourced material and, where appropriate, a regulated adviser.

Adapted from / source note

This post is adapted from The Street Smart Trader. Used with permission.