Fully Paid Securities Lending Rebate Skim
The Formal Definition
The revenue-sharing model where a retail brokerage lends fully paid customer shares to short sellers and institutional hedge funds, pocketing the vast majority of the short borrow fee while paying the retail stock owner a token fraction of the revenue.
Client Received Yield = Gross Borrow Fee Paid by Short Seller × Broker Passthrough Ratio (Typically 20% to 50%)
Cole Barrett's Reality Check
The Unvarnished Bottom Line"Brokers love pitching Fully Paid Lending as 'free passive income.' They take your hard-to-borrow stock, lend it to a hedge fund shorting the company at a 50% annual fee, hand you a 10% cut, and pocket the other 40% for themselves. You're financing the very short sellers driving down your stock, and your broker is taking the lion's share of the toll."
Interactive Simulator: Test the Math
Real-World Example: Scenario Breakdown
Examining the real numbers for: An investor holding $100,000 worth of a heavily shorted growth equity enrolled in a broker securities lending program over 90 days
| Execution Metric | Institutional 50/50 Share Client (IBKR) | Zero-Commission Retail App Client |
|---|---|---|
| Fee / Rate | $0 account fees | $0 advertised commission |
| Spread / Buffer | Broker lent the shares at a market borrow rate of 30.0% annualized ($7,500 gross interest generated over 90 days) | Shares enrolled automatically via default terms; broker lent shares to hedge funds at the identical 30.0% market rate |
| Execution / Status | Broker operates on an audited, transparent 50/50 revenue split with the customer | Broker passed through an un-audited 15% revenue share, pocketing the remaining 85% internally |
| Total Cost / Result | Captured fair market value for lent securities | Surrendered 85% of securities lending revenues to the broker |
How Brokers Weaponize This Term
Open your brokerage agreement and search for 'Securities Lending Program Terms'. Check the exact 'Revenue Share Percentage'. If your broker keeps more than 50% of gross borrow fees, opt out of the program—you are subsidizing short sellers on your positions for pennies.
Broker Evaluation Matrix
Cole Approves
Interactive Brokers: Operates the Stock Yield Enhancement Program on a transparent, audited 50/50 gross revenue split with full daily transaction reporting.
Read Audit →Cole Flags / Avoids
Zero-Commission Neobrokers: Enrolls user accounts into securities lending programs by default while pocketing 75% to 85% of institutional borrow fees.
View Trap Details →Frequently Asked Questions
Are my shares protected by SIPC while on loan?
No. When shares are lent out, SIPC coverage is suspended. However, regulated brokers must post 100% to 102% cash collateral into an independent bank trust to protect you if the borrower defaults.
How do dividend payments work while shares are lent?
You receive 'Cash-in-Lieu of Dividends', which does not qualify for preferential long-term qualified dividend tax rates and is taxed at your higher ordinary income tax rate.