When stocks soar
08 July 2025
Matt Chessum, director of securities finance at S&P Global Market Intelligence, looks at how record equity valuations supercharge securities lending markets
Image: Shutterstock
When equity markets surge to record highs, it is natural to focus on the headlines: booming valuations, investor euphoria, and stretched multiples. Recently, both the S&P 500 and the Nasdaq Composite have reached new all-time highs. The S&P 500 rose to 6,173, surpassing its previous record of 6,144. Similarly, the Nasdaq Composite hit a new peak at 20,273. But beneath the surface of the rally lies a lesser-known beneficiary, the securities lending market.
While often viewed as a background operation in the financial ecosystem, securities lending becomes a centre of opportunity when valuations soar. As stocks climb, demand for borrowing them often rises in tandem, driven by a range of motivations, from hedging and arbitrage to outright short selling. For beneficial owners and lending agents, this environment can translate into increased revenues, more active portfolios, and broader market engagement.
The mechanics: Why securities become more valuable to borrow
At the heart of the securities lending business is the ability to generate returns by lending out assets — equities, bonds, ETFs — to borrowers who typically use them for short selling or arbitrage. Borrowers pay a fee to access these assets, and the fee varies based on supply and demand. When a stock’s valuation increases, so too does the notional value of each lent share, which means the absolute revenue collected on a loan can rise even if fee rates stay flat.
But what is even more important is that high valuations often create divergent market views. For every investor euphoric about the future of a high-flying tech stock, there is another who thinks the stock is overbought and primed for a correction. This divergence fuels short-selling demand which is often one of the core sources of borrowing in securities lending markets. The more controversial a rally, the more likely it is that sceptics will want to express a contrary view. That means greater demand to borrow those ‘hot’ names, which pushes up lending fees and makes them more profitable to lend.
Specials and scarcity in a bull market
A notable dynamic in high-valuation environments is the emergence of ‘specials’ — securities that command unusually high fees due to scarcity or elevated demand. These are often companies with fast-rising stock prices, limited free float, recent IPOs, or those at the centre of market narratives (think meme stocks or AI plays). As valuations increase and retail investor interest grows, some shares become harder to locate, and borrowing costs rise. For beneficial owners, these specials can offer a significant boost to portfolio-level lending revenue.
During record-breaking market periods, special names tend to rotate more rapidly. What is hot one week may cool off the next, meaning that lending desks must stay nimble, adjusting inventory availability, fee structures, and recall strategies. In this sense, record valuation environments create an atmosphere of heightened activity, both in the front office and operationally.
ETF lending: The overlooked engine
Another often overlooked dimension is the impact on ETFs. When broad indices climb to new highs, demand for index-based exposure increases, and so does the need to hedge it. Market makers and arbitrageurs who work to keep ETF prices in line with their net asset value (NAV) frequently need to borrow underlying equities to complete their strategies. Rising valuations make these strategies more active, and in turn, increase ETF lending volumes. Additionally, ETFs themselves are increasingly lent as collateral or shorted directly, contributing another stream of demand in buoyant equity markets.
Risk management and collateral quality
A rally in equities also affects the quality of collateral received in lending transactions. With portfolios appreciating in value, the size and quality of assets that can be pledged as collateral also increase. This improves the overall risk profile of the lending operation and can open up opportunities for borrowers to negotiate larger trades or more favourable terms, knowing the lender’s risk buffer has grown. From a risk management perspective, lenders are often more willing to remain engaged with the market when the underlying assets are performing well.
Revenue data backs the trend
Historical data shows that securities lending revenue often rises during equity bull markets, especially when those rallies are driven by high-momentum or speculative sectors. For example, the first half of 2021, a period marked by surging equity valuations and meme-stock mania, saw global lending revenues spike to multi-year highs. Similarly, 2023 and early 2025 witnessed notable increases in lending income, especially in tech and AI-related sectors, as investors sought to hedge or short into overvalued conditions.
Figure 1: S&P 500 closing price versus securities lending revenues
Beneficial owners: Passive strategies, active returns
For asset owners, pension funds, sovereign wealth funds, insurance firms, record equity markets offer a dual advantage: appreciation in the underlying assets and an uptick in lending-related income. Even portfolios with a largely passive strategy can realise active revenue through a robust securities lending programme. When executed prudently, lending can become a stable contributor to overall fund performance, particularly in periods when traditional income sources like fixed income are less generous.
Final thoughts
While equity rallies tend to steal the spotlight, securities lending markets thrive in the background, especially when valuations soar. From the generation of alpha through lending fees, to the management of short interest and execution of complex trading strategies, the lending market plays a critical role in balancing optimism with scepticism. Record valuations may spark fear of a bubble for some, but for the securities lending ecosystem, they often signal a wave of opportunity.
While often viewed as a background operation in the financial ecosystem, securities lending becomes a centre of opportunity when valuations soar. As stocks climb, demand for borrowing them often rises in tandem, driven by a range of motivations, from hedging and arbitrage to outright short selling. For beneficial owners and lending agents, this environment can translate into increased revenues, more active portfolios, and broader market engagement.
The mechanics: Why securities become more valuable to borrow
At the heart of the securities lending business is the ability to generate returns by lending out assets — equities, bonds, ETFs — to borrowers who typically use them for short selling or arbitrage. Borrowers pay a fee to access these assets, and the fee varies based on supply and demand. When a stock’s valuation increases, so too does the notional value of each lent share, which means the absolute revenue collected on a loan can rise even if fee rates stay flat.
But what is even more important is that high valuations often create divergent market views. For every investor euphoric about the future of a high-flying tech stock, there is another who thinks the stock is overbought and primed for a correction. This divergence fuels short-selling demand which is often one of the core sources of borrowing in securities lending markets. The more controversial a rally, the more likely it is that sceptics will want to express a contrary view. That means greater demand to borrow those ‘hot’ names, which pushes up lending fees and makes them more profitable to lend.
Specials and scarcity in a bull market
A notable dynamic in high-valuation environments is the emergence of ‘specials’ — securities that command unusually high fees due to scarcity or elevated demand. These are often companies with fast-rising stock prices, limited free float, recent IPOs, or those at the centre of market narratives (think meme stocks or AI plays). As valuations increase and retail investor interest grows, some shares become harder to locate, and borrowing costs rise. For beneficial owners, these specials can offer a significant boost to portfolio-level lending revenue.
During record-breaking market periods, special names tend to rotate more rapidly. What is hot one week may cool off the next, meaning that lending desks must stay nimble, adjusting inventory availability, fee structures, and recall strategies. In this sense, record valuation environments create an atmosphere of heightened activity, both in the front office and operationally.
ETF lending: The overlooked engine
Another often overlooked dimension is the impact on ETFs. When broad indices climb to new highs, demand for index-based exposure increases, and so does the need to hedge it. Market makers and arbitrageurs who work to keep ETF prices in line with their net asset value (NAV) frequently need to borrow underlying equities to complete their strategies. Rising valuations make these strategies more active, and in turn, increase ETF lending volumes. Additionally, ETFs themselves are increasingly lent as collateral or shorted directly, contributing another stream of demand in buoyant equity markets.
Risk management and collateral quality
A rally in equities also affects the quality of collateral received in lending transactions. With portfolios appreciating in value, the size and quality of assets that can be pledged as collateral also increase. This improves the overall risk profile of the lending operation and can open up opportunities for borrowers to negotiate larger trades or more favourable terms, knowing the lender’s risk buffer has grown. From a risk management perspective, lenders are often more willing to remain engaged with the market when the underlying assets are performing well.
Revenue data backs the trend
Historical data shows that securities lending revenue often rises during equity bull markets, especially when those rallies are driven by high-momentum or speculative sectors. For example, the first half of 2021, a period marked by surging equity valuations and meme-stock mania, saw global lending revenues spike to multi-year highs. Similarly, 2023 and early 2025 witnessed notable increases in lending income, especially in tech and AI-related sectors, as investors sought to hedge or short into overvalued conditions.
Figure 1: S&P 500 closing price versus securities lending revenues
Beneficial owners: Passive strategies, active returns
For asset owners, pension funds, sovereign wealth funds, insurance firms, record equity markets offer a dual advantage: appreciation in the underlying assets and an uptick in lending-related income. Even portfolios with a largely passive strategy can realise active revenue through a robust securities lending programme. When executed prudently, lending can become a stable contributor to overall fund performance, particularly in periods when traditional income sources like fixed income are less generous.
Final thoughts
While equity rallies tend to steal the spotlight, securities lending markets thrive in the background, especially when valuations soar. From the generation of alpha through lending fees, to the management of short interest and execution of complex trading strategies, the lending market plays a critical role in balancing optimism with scepticism. Record valuations may spark fear of a bubble for some, but for the securities lending ecosystem, they often signal a wave of opportunity.
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