45-year old securities lending the “last bastion of oldtech”

By Alex Hamilton | 10 December 2018

Moving from regular trading to securities lending is like “buying a suit on Bond Street and then heading to Camden Market to get your socks,” says Boaz Yaari, CEO of Sharegain.

“Securities is the last bastion of oldtech in capital markets,” says Yaari. “It’s a 45-year old industry, it’s relationship-based and driven by systems that might be more than 15-20 years old. That creates a lot of inefficiency.

“It’s very simple. You have a financial asset and you can rent it out. Stock, bond, ETF – no matter what – you can rent it out. The only one you can’t as a private investor is securities, yet for 45 years the biggest and most conservative asset managers globally have been doing this. They have been banking billions from renting out their stocks.”

In late September, a US judge ordered Goldman Sachs, JP Morgan and four other large banks to face an antitrust lawsuit over their supposed “stifling” of the securities lending market. Up to $2.3tn of assets are lent globally, creating almost $9bn in revenue for the owners.

A January 2018 survey of investors by DataLend and Funds Europe found that 59% of respondents engaged in stock lending to boost returns, compared to 36% who did so to cover operational costs. The survey also highlighted a shift in accountability for oversight, where 56% named the chief investment officer or portfolio manager, compared to 36% laying the responsibility at the feet of the COO or operations manager. This change towards the front office might leave the door open for fintechs looking for problems to solve.

But the problem with capital markets fintech, says Yaari, is that “they’re all optimisers, not value creators”. “They find somewhere where things are done manually, or there is a bottleneck. They solve those problems and get to a valuation of $100m or $200m and get bought up.” Yaari concedes that this isn’t a “bad deal”: “It’s definitely a good deal for them,” he says, but that’s not what his company is aiming for. Sharegain has raised $11.4m in funding since 2016, with the latest occurring in early November 2018, from investors Blumberg Capital, Maverick Ventures and Target Global.

Sharegain isn’t the first to attempt disruption of the securities lending sector. “Others have tried this and failed: AQS and SLX for example.” Firms have come in and attempted disintermediation, says Yaari. This approach, he states, has two problems: “First, in a heavily regulated, mediated and fragmented industry the last thing you want to do is disintermediate everybody because they have a bigger role than just sitting in the middle of things. Secondly, securities lending is not a primary investment opportunity – it’s secondary at best. What you want is to buy your shares and have something that generates additional income on the side but which you have control over. Predecessors in the industry, Yaari adds, made a mistake in telling customers “’here’s your platform, go and trade’”. Failing to realise that consumers hate the “creation of all that extra work” spelled their doom, he believes.

Yaari compares the democratization of securities lending to the rise of AirBnB. “A few years ago, when they first started, people were saying ‘there’s no way I will rent out my place on this app’, but they managed to bridge the trust gap. With securities lending, people have an asset they cannot access because the banks won’t allow them to do it. Now [people] are more conscious of the fact that they have assets sitting idle, gathering dust and someone is making billions off of it. Why can’t [they] get value from it, too?”

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