Q&A with Hazeltree’s Tim Smith: Why Transparency Is Essential in Securities Finance Data

Until 2008, the business of securities finance was shrouded in secrecy and opacity. Some of the stakeholders in the value chain remained outside of the ‘ring of knowledge’ needed to brought inside. Secondly, there was a lack of detail around specific securities’ data points that were only available to a precious few.

The traditional value chain starts with the institutional holders of securities at one end, followed by the global custodian banks and the broker dealer/primes and ends with the asset managers as the ultimate borrowers. Each stakeholder in this chain has their own priorities when it

comes to data.

Over the last decade, however slowly, greater transparency has been achieved due to the involvement of a number of major data players and driven by regulatory edict, better counterparty risk monitoring, and the quest for efficiency and revenue. Hazeltree Managing Director of Business Development Tim Smith talks about the value behind this data and why increased transparency is key to leveling the playing field.

Q: What Value Can Securities Finance Data Provide?

A: This type of data can help expose outliers in terms of lending rates and other formerly overlooked factors. But it also yields an array of portfolio insights that goes far beyond the costs involved to execute a given strategy. The most advanced users of securities finance data are leveraging all available intel to gain insights into potential impacts on their current positions.

A robust set of securities lending data allows firms to effectively shop around, avoiding overcharging, creating more economical relationships and enabling more profitable trades. For a larger hedge fund, which should enjoy economies of scale, this data can help them realize the advantages that should come with size. But for even smaller managers, relatively small basis-point improvements can add up to significantly enhanced profits.

Q: How Does Data Transparency Affect Decision-Making?

A: As many discovered during the GameStop saga last year, it can behoove investors to understand the make-up of the investor base, be it long or short, to avoid getting blindsided. And data, such as borrowing fees, provide invaluable insights around the percentage of shorts that have covered and at which point they closed out their short positions. The data can reveal market movements and help guide strategies, particularly during periods of volatility.

Furthermore, given the growing history of positional movements among the buy side community and the relative crowdedness of particular securities and the variations in the

number of holders of short and long positions, numerous additional metrics are becoming available for the monitoring of not just the “hottest” of securities but also the “general collateral” or easy-to-borrow securities on a global basis.

Securities data can be just as powerful when it helps to surface mispricing opportunities and latent risks. Consider, for instance, the extent to which long-short data can serve as an early warning system for funds, allowing fund managers to pick up important signals that otherwise might come too late.

Q: What Metrics Are Now Available?

• A: Broker internalization: Insight into the captured long positions usage by the prime brokers is a key indicator of securities finance flow as yet untapped.
• Crowdedness on both a long and short basis: This can be broken down by market value and the number and proportional fund holder “buckets.”
• Conviction: Aggregate allocations to specific names across all funds.
• Physical versus synthetically held positions: This is particularly relevant in many global markets.
• Capital flow: Buy and sell activity and flow around all securities.

While this data may not seem as essential in a low-volatility market environment, as interest rates climb and the geopolitical backdrop becomes more uncertain, it will become much more critical to understand all the drivers that will influence the underlying market movements.

Q: Why Is This Important?

A: It has now become the reality that data is the oil in the engine of securities finance. Stakeholders are hungry for the fullest data to make the best decisions and to be able to react nimbly to changing conditions. A fundamental challenge is how to best cut through the noise; with enhanced lending and long-short data, important messages in securities finance come through clearly, enabling consumers to predict, protect and profit.