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Securities lending: Prime time for a change

Electronic Trading’s lawsuit is shining some light on the opaque world of securities lending. Meanwhile other intermediaries are springing up.

The securities lending market is attracting closer scrutiny from its users, given the vast number of hedge funds now requiring to borrow stock to be used in shorting transactions. Earlier this year, institutional trading firm Electronic Trading Group filed a lawsuit against many of Wall Street’s securities lending businesses and individuals, accusing them of setting excessive fees and controlling the securities lending industry.

Law firm Entwistle and Cappucci, which is handling Electronic Trading’s action, did not return calls to confirm the status of the case, but some industry sources suggest that discussions with the defendants are under way. However, the case has highlighted what many hedge funds have been bemoaning for years: a lack of transparency in the pricing of lending fees, and the power that the prime brokers have obtained in the industry. According to recent research by Vodia Group, prime brokers set the rates that 95% of hedge funds accept. “The remaining 5% may be able to step outside of the prime brokers but they remain an exception,” says Josh Galper, managing principal at Vodia. According to his firm’s research, securities lending and financing generates about $10 billion in fees annually for Wall Street.

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