Securities lending happens in all aspects of finance from banking to exporting to the exchange of stock. In fact, because securities lending is an over-the-counter market it is hard to put an accurate number to the industry. However, it has been suggested that the balance of securities on loan in the year 2007 alone exceeded 3 trillion dollars.

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Who are these Securities Lenders?

There are hundreds of companies around the world who are security lenders. Often called sec lenders, these corporations range from banks such as the Bank of New York and CitiBank to specific security lender companies such as eSecLending and Wachovia. Financial corporations such as Pension Financial Services and Jefferies and Company also provide sec lenders. Furthermore, these companies are based globally, big name lenders in London, Tokyo, Hong Kong, Germany, Netherlands, Canada and all around America.

Why do People use Securities Lenders?

Securities lenders will increase the overall performance of the borrowed stock. By borrowing securities, traders can take place in strategies such as pairs trading and risk arbitrage thus making a higher income. They are able to take place is higher risk trading with the cover of shorts and the prevention of fails. Securities lenders also help to manage balance sheets and finance inventory. Furthermore, security lenders act as a middle man, helping the traders along the way.

How Does Securities Lending Actually Work?

Security Lending is often used in short selling on the stock market. A trader will deliver the borrowed stock to another party in order to satisfy the order they agreed on. The sec lender will charge an annual fee for the lending of the stock. The trader will return the borrowed stock at a later time, hopefully when the stock price is down. That way they can re-sell the borrowed stock at a lower price than they initially borrowed it at and pocket the extra money.

Unfortunately, short selling has been taken to a whole new level called naked short selling. It has already had a horrible impact on our market in recent weeks and now the SEC has had to ban short selling altogether for a short while. However, the media speaks of the short selling ban because of corruption in security lending, but they do not mention naked short selling. Why is this?

This is probably due in part to the fact that the first words that come to mind when naked short selling is mentioned is “terrorist attack.” Naked short selling is an attack on the market because it is intentional. Those who initiate the attack know what they are doing and what effect it is going to have on the market. The market is going to tumble, which is exactly what has happened in recent weeks.

There is a very interesting report that explains security lending in detail and how naked short selling has a horrible impact on the securities market. This report is called Wall Street Under Attack: Naked Short Selling and the Illegal Hacking of the U.S. Securities Market.

The U.S. has an incredible financial system, but there are individuals trying to ruin it by taking advantages of loopholes and hurting individuals and companies. America must become educated on this and how it ties into our existing financial crisis so that a stop can be put to it.

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