Monthly Securities Finance Market Review: September 2023

EquiLend’s Head of Trading Solutions, Mike Norwood , shares his monthly market review for securities finance with some change of pace for September trading after a hot summer for markets. The following data has been measured and derived from EquiLend NGT.

Monthly Trends

Continuing the correlation with market volatility, securities lending demand as measured by transactions on EquiLend’s NGT platform saw some slowness in September, specifically in the first half, with acceleration post The U.S. Federal Reserve meeting and into the beginning of October. One small positive was a mid-month spike in volatility from September 14 through the end of the month, fueled by the increased cost of borrowing and uncertainty in the hard to borrow space. This was reflected in an increase in our composition of GC versus non-GC sliding towards GC.

Overall, the story was downward trending trade counts which were 2,492,860 versus $ 2.31 trillion, down 9% from August and 6% year over year. This closed out a quarter that saw volumes increase by 4% from Q2 but represented a 1% decline from Q3 2022, largely due to softening demand for global equities. Overall fixed income saw historically high levels of execution as volumes climbed 26% year over year in September to close out a record quarter for that asset class with roughly 2 million fixed income trades executed (+19% from Q3 2022 and +10% from Q2 2023).

Global Borrowing and Lending

Volatility spiked on the back of The Fed posturing about additional rate increases, and we saw a downward trend in equities price action as a result. The VIX saw approximately a 30% increase with The Fed’s suggestion that they are leaning toward a further rate increase as the battle to control inflationary pressures continues. EquiLend observed a meaningful pickup in fixed income trading in September, with trade counts reaching 26% of all trades executed on the platform. Japanese equity activity was lower month on month despite the September 30 half-year reporting cycle for many companies. Europe continued to see increased borrow flows in the equity space despite persistent underperformance relative to U.S. equity peers.

ETF activity in North America for investment grade, high yield and municipal debt was very active as the move in CDS levels prompted increased borrow demand in the benchmark ETFs. Thematically, Electric Vehicles (EV), along with EV component sub-sectors, remain an active borrow focus. AI themes have also ticked up, and in response, we’ve seen persistent shorting in names that have moved materially higher on the back of the euphoria surrounding the efficiencies markets believe that these AI companies will drive. Counter to this, the retail sector is feeling the pinch with media inference that the reduction in consumer discretionary income is being played out in restaurants. The addition of student loan repayments resuming is also expected to contribute to this weakened consumer dynamic. We’ve seen a reflection of this narrative in NGT as evidenced in the trade flow data below.

Sectors Focus

Within global equities, NGT’s most in-demand sectors were:

Both globally and closer to home, it’s a great time to be in fixed income, but the wider markets are trading a rocky road. It remains to be seen what the continued threat of inflation-busting measures will have as we head towards the end of the year.

Follow securities finance trends, trading analysis and commentary with EquiLend’s Monthly Trading Commentary across 2023.