Specials dry up as volatility eases
02 May 2017
The number of equity specials, and the fees they generate, has fallen significantly, which has affected revenues. IHS Markit’s Simon Colvin reports
Image: Shutterstock
Securities lending revenues earned by beneficial owners over the opening quarter of 2017 failed to match those earned in Q1 2016, when surging market volatility took the industry’s profitability to levels not seen since the financial crisis. Overall, industry revenues are down by over 6 percent from the same period last year. Equities are the main culprit as the securities lending fees earned by the asset class came up short by a massive 21 percent. In dollar terms, the overall revenue shortfall amounts to just over $113 million for the entire group of beneficial owners that contribute to IHS Markit Securities Finance dataset.
IHS Markit’s Securities Finance Quarterly Review highlights that declining equities revenues are a global phenomenon as Asian, American and European markets all failed to match the revenue tally earned over last year’s opening quarter.
The relative calm in the equities market experienced in Q1 has played a large role in this revenue slump as short sellers gave up fighting the global bull market that has gripped equities in the months since the US election. Decreasing appetite to sell shares short in the current market is perhaps best highlighted by the fact that far fewer shares traded special over Q1 than during same time last year.
Specials, defined as the shares which trade with a fee of more than 100 basis points, used to make up 17 percent of the 5,000 most actively traded stocks at the end of Q1 last year. The recent calm has seen the proportion of specials shrink to 14.6 percent at the end of March, the smallest number since the end of 2015.
Not surprisingly, commodities related stocks, which were responsible for much of the market upheaval last year, drove the specials retrenchment after commodities markets started to rebound from the lows set last February. Nearly a quarter of all energy names used to trade special in the first week of March 2016, the week after what turned out to be the lows set in oil prices. That number has since nearly halved as 15 percent of energy names traded north of 100 basis points at the end of Q1—the lowest proportion since the end of 2015.
The other commodities sector, materials, has also registered a material decline in the number of its shares trading special which has fallen from 19 percent to 15 percent over the past 12 months.
The story isn’t entirely driven by the commodities sector, however, as the main protagonists of last year’s volatility, a slowing of growth in China and the threat of deflation in Europe, meant that pretty much every other sector registered a material rise in the number of shares trading special. The market rebound means that 18 of the 22 non-commodities related sectors traded with a smaller proportion of on specials at the end of March than the same period 12 months ago.
Telecommunications are a holdout from this trend as 20 percent of the sector now trades special, up from 15 percent 12 months ago. This is only a small consolation for the industry, however, as the sector is only responsible for 83 of the 5,000 most actively traded equities in the securities lending market, less than a quarter of those in the energy sector. Borrowers are also less willing to pay up for the shrinking number of specials as the weighted average fee commanded by all special stocks fell to 4.5 percent at the end of Q1, down from 5.6 percent 12 months prior.
Both the falling proportion of specials and their increasing cheapness combined explain the near totality of the $299 million revenue gap experienced in equities over Q1 as the average daily revenues from specials was $3 million short of that delivered 12 months ago.
IHS Markit’s Securities Finance Quarterly Review highlights that declining equities revenues are a global phenomenon as Asian, American and European markets all failed to match the revenue tally earned over last year’s opening quarter.
The relative calm in the equities market experienced in Q1 has played a large role in this revenue slump as short sellers gave up fighting the global bull market that has gripped equities in the months since the US election. Decreasing appetite to sell shares short in the current market is perhaps best highlighted by the fact that far fewer shares traded special over Q1 than during same time last year.
Specials, defined as the shares which trade with a fee of more than 100 basis points, used to make up 17 percent of the 5,000 most actively traded stocks at the end of Q1 last year. The recent calm has seen the proportion of specials shrink to 14.6 percent at the end of March, the smallest number since the end of 2015.
Not surprisingly, commodities related stocks, which were responsible for much of the market upheaval last year, drove the specials retrenchment after commodities markets started to rebound from the lows set last February. Nearly a quarter of all energy names used to trade special in the first week of March 2016, the week after what turned out to be the lows set in oil prices. That number has since nearly halved as 15 percent of energy names traded north of 100 basis points at the end of Q1—the lowest proportion since the end of 2015.
The other commodities sector, materials, has also registered a material decline in the number of its shares trading special which has fallen from 19 percent to 15 percent over the past 12 months.
The story isn’t entirely driven by the commodities sector, however, as the main protagonists of last year’s volatility, a slowing of growth in China and the threat of deflation in Europe, meant that pretty much every other sector registered a material rise in the number of shares trading special. The market rebound means that 18 of the 22 non-commodities related sectors traded with a smaller proportion of on specials at the end of March than the same period 12 months ago.
Telecommunications are a holdout from this trend as 20 percent of the sector now trades special, up from 15 percent 12 months ago. This is only a small consolation for the industry, however, as the sector is only responsible for 83 of the 5,000 most actively traded equities in the securities lending market, less than a quarter of those in the energy sector. Borrowers are also less willing to pay up for the shrinking number of specials as the weighted average fee commanded by all special stocks fell to 4.5 percent at the end of Q1, down from 5.6 percent 12 months prior.
Both the falling proportion of specials and their increasing cheapness combined explain the near totality of the $299 million revenue gap experienced in equities over Q1 as the average daily revenues from specials was $3 million short of that delivered 12 months ago.
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