This is interesting.
To quote Steve Quirk, Chief Brokerage Officer at Robinhood:
“Our version of Stock Lending empowers customers to put their investments to work while keeping it simple. Robinhood does the work of finding borrowers and managing transactions while customers can add a potential source of passive recurring income to their portfolio. We’re excited to break down yet another barrier and democratize a product that has been historically preserved for the wealthy with high barriers to entry.”
Traditionally, brokerages would lend out shares in long positions without compensating owners. Banks, other brokerages, etc., use these shares to enable shorting of stock. By law, shorted shares must actually exist (but naked shorting persists, for some reason). Yet the actual owner never benefitted from this process. Only the brokerage that held the shares on behalf of the owner. It appears that Robinhood is now cutting in their account owners for a peice of the action.
“Financial institutions and other market participants will often borrow stocks for many reasons, including to cover deficits, failed deliveries, collateral, or to cover short sales. This is why stocks with low market availability and high demand are more likely to be borrowed. Stock Lending is currently rolling out to customers and we expect it to be available to all customers by the end of May.”
Now, Robinhood does not disclose how much shareholders will earn. But something should be better than zero.
Robinhood does add:
“You may lose the right to vote with respect to loaned securities, and you will receive cash payments in lieu of dividends on such securities; the cash payments may be taxed differently than dividends. You should consult with a tax professional before enrolling in Stock Lending.”
Losing the right to vote your shares could be key. The fine print is available here.
So this may be a positive for Robinhood users but be certain to review the details when it is available later this month.