How stock market volatility fuels securities lending, but uncertainty stifles it
15 April 2025
For beneficial owners, intermediaries, and borrowers alike, navigating this line is essential. Volatility is the engine of opportunity, says Matthew Chessum, director of securities finance at S&P Global Market Intelligence
Image: Shutterstock
Securities lending thrives in a dynamic market environment. One of the most counterintuitive yet well-established truths in the industry is that stock market volatility is often good for securities lending activity. At the same time, persistent or unpredictable uncertainty, especially when rooted in geopolitical tensions or economic instability such as trade tariffs, can have a chilling effect. Understanding this dichotomy is essential to grasp how securities lending fits into the broader financial ecosystem.
Volatility breeds demand
Stock market volatility reflects rapid price swings and elevated trading volumes, which tend to coincide with heightened investor sentiment — bullish or bearish. For the securities lending market, this spells opportunity. When prices fluctuate widely, short sellers become more active, borrowing stocks to capitalise on downward price moves. As demand to borrow shares rises, beneficial owners — such as pension funds and asset managers — can earn higher fees by lending securities, especially hard-to-borrow names that are in high demand due to market speculation.
This increased lending activity not only drives revenues for asset holders and lending agents, but also supports market efficiency. Short selling, which is enabled by securities lending, helps correct overvalued prices, enhances liquidity, and contributes to price discovery. In volatile conditions, short sellers often emerge in greater numbers, trying to profit from what they perceive as temporary mispricings or overheated valuations. This behaviour generates both directional and arbitrage-based borrowing demand, particularly in sectors experiencing significant upheaval or investor scrutiny.
The sweet spot: Predictable turbulence
There is a “sweet spot” in the market where volatility is high but bounded within a relatively known risk environment. For example, earnings seasons, interest rate announcements, or expected shifts in monetary policy can inject volatility without destabilising the entire system. In such cases, market participants can model risk with reasonable confidence, and securities lending thrives.
During these periods, lendable assets become more valuable due to higher utilisation rates, while borrowers are more willing to pay elevated fees for access to specific names or sectors. Lending desks can also engage in more sophisticated collateral optimisation strategies, as turnover increases and spreads widen.
Uncertainty is the enemy of risk appetite
However, not all turbulence is created equal. When volatility stems from uncertainty — particularly geopolitical risk or erratic economic policies — the effect on securities lending is often negative. Uncertainty makes it difficult for market participants to price risk or form reliable expectations, leading to reduced risk appetite and a contraction in borrowing and lending activity.
A prime example of this is the impact of trade tariffs and protectionist economic measures, which inject a layer of unpredictability into global supply chains and corporate earnings forecasts. When governments impose tariffs without clear timelines or escalate trade tensions without diplomatic resolution in sight, investors struggle to gauge the implications for sectors like manufacturing, technology, or agriculture. This environment leads to broad-based de-risking rather than targeted short selling, depressing both demand for securities borrowing and willingness to lend.
Furthermore, geopolitical risks — such as military conflicts, sanctions, or political instability — can cause liquidity to dry up and funding markets to tighten. In such times, lenders may recall loans, increase collateral requirements, or withdraw from the market entirely, fearing counterparty or settlement risk. This behaviour further suppresses activity and reduces revenues for all involved parties.
The negative impact of uncertainty on securities lending activity can be evidenced by the rapid decline in securities lending balances across all equities between 25 March and 8 April. Balances not only fell by over US$150 billion during this period but volume-weighted average fees also dropped by over 20 basis points over an even shorter five-day period (3 April – 8 April).
Risk aversion and regulation
Periods of sustained uncertainty also tend to coincide with heightened regulatory scrutiny or changes to capital and liquidity requirements. In such climates, market participants — especially prime brokers and banks — become more conservative in their risk frameworks, curtailing balance sheet usage for securities lending and repo activities. Reduced intermediation by these key players limits the ability of borrowers to access securities, stifling activity even further. Regulatory responses were recently seen in response to the heightened market volatility as Taiwan, Thailand, and Turkey implemented varying degrees of short sale bans to stabilise their financial markets.
Navigating the fine line
Securities lending flourishes when volatility is driven by tradable information and investor sentiment, rather than opaque and unpredictable risks. Volatility, when anchored in known catalysts, promotes active trading strategies that require access to borrowed securities, thereby supporting the securities lending ecosystem. On the other hand, uncertainty — especially when rooted in geopolitical strife or economic disruption like trade tariffs — undermines confidence and suppresses market participation.
For beneficial owners, intermediaries, and borrowers alike, navigating this line is essential. Volatility is the engine of opportunity — but only when the road ahead can be reasonably mapped.
Volatility breeds demand
Stock market volatility reflects rapid price swings and elevated trading volumes, which tend to coincide with heightened investor sentiment — bullish or bearish. For the securities lending market, this spells opportunity. When prices fluctuate widely, short sellers become more active, borrowing stocks to capitalise on downward price moves. As demand to borrow shares rises, beneficial owners — such as pension funds and asset managers — can earn higher fees by lending securities, especially hard-to-borrow names that are in high demand due to market speculation.
This increased lending activity not only drives revenues for asset holders and lending agents, but also supports market efficiency. Short selling, which is enabled by securities lending, helps correct overvalued prices, enhances liquidity, and contributes to price discovery. In volatile conditions, short sellers often emerge in greater numbers, trying to profit from what they perceive as temporary mispricings or overheated valuations. This behaviour generates both directional and arbitrage-based borrowing demand, particularly in sectors experiencing significant upheaval or investor scrutiny.
The sweet spot: Predictable turbulence
There is a “sweet spot” in the market where volatility is high but bounded within a relatively known risk environment. For example, earnings seasons, interest rate announcements, or expected shifts in monetary policy can inject volatility without destabilising the entire system. In such cases, market participants can model risk with reasonable confidence, and securities lending thrives.
During these periods, lendable assets become more valuable due to higher utilisation rates, while borrowers are more willing to pay elevated fees for access to specific names or sectors. Lending desks can also engage in more sophisticated collateral optimisation strategies, as turnover increases and spreads widen.
Uncertainty is the enemy of risk appetite
However, not all turbulence is created equal. When volatility stems from uncertainty — particularly geopolitical risk or erratic economic policies — the effect on securities lending is often negative. Uncertainty makes it difficult for market participants to price risk or form reliable expectations, leading to reduced risk appetite and a contraction in borrowing and lending activity.
A prime example of this is the impact of trade tariffs and protectionist economic measures, which inject a layer of unpredictability into global supply chains and corporate earnings forecasts. When governments impose tariffs without clear timelines or escalate trade tensions without diplomatic resolution in sight, investors struggle to gauge the implications for sectors like manufacturing, technology, or agriculture. This environment leads to broad-based de-risking rather than targeted short selling, depressing both demand for securities borrowing and willingness to lend.
Furthermore, geopolitical risks — such as military conflicts, sanctions, or political instability — can cause liquidity to dry up and funding markets to tighten. In such times, lenders may recall loans, increase collateral requirements, or withdraw from the market entirely, fearing counterparty or settlement risk. This behaviour further suppresses activity and reduces revenues for all involved parties.
The negative impact of uncertainty on securities lending activity can be evidenced by the rapid decline in securities lending balances across all equities between 25 March and 8 April. Balances not only fell by over US$150 billion during this period but volume-weighted average fees also dropped by over 20 basis points over an even shorter five-day period (3 April – 8 April).
Risk aversion and regulation
Periods of sustained uncertainty also tend to coincide with heightened regulatory scrutiny or changes to capital and liquidity requirements. In such climates, market participants — especially prime brokers and banks — become more conservative in their risk frameworks, curtailing balance sheet usage for securities lending and repo activities. Reduced intermediation by these key players limits the ability of borrowers to access securities, stifling activity even further. Regulatory responses were recently seen in response to the heightened market volatility as Taiwan, Thailand, and Turkey implemented varying degrees of short sale bans to stabilise their financial markets.
Navigating the fine line
Securities lending flourishes when volatility is driven by tradable information and investor sentiment, rather than opaque and unpredictable risks. Volatility, when anchored in known catalysts, promotes active trading strategies that require access to borrowed securities, thereby supporting the securities lending ecosystem. On the other hand, uncertainty — especially when rooted in geopolitical strife or economic disruption like trade tariffs — undermines confidence and suppresses market participation.
For beneficial owners, intermediaries, and borrowers alike, navigating this line is essential. Volatility is the engine of opportunity — but only when the road ahead can be reasonably mapped.
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Double trouble: How political risk complicates securities lending amid economic uncertainty
Double trouble: How political risk complicates securities lending amid economic uncertainty
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