Borrow fee

A borrow fee is the cost a short seller pays to borrow shares, expressed as an annualized percentage of the position's value and typically charged daily for as long as the short is open. It is set by supply and demand in the securities lending market.

How it works

When a trader sells short, the broker borrows the shares from its own inventory, other customers' margin accounts or institutional lenders such as funds and custodians. The lender earns a fee, and the broker passes that cost, plus a markup, to the short seller.

• Easy-to-borrow stocks (large, liquid names with plenty of lendable shares) carry fees well under 1% a year.
• Hard-to-borrow stocks can carry fees of 20%, 50%, or even several hundred percent a year when lendable supply runs out.

Rates are not locked. Brokers can raise them daily, and the fee is usually charged on the current market value of the shorted shares, so it grows as the stock rises.

Why it matters for traders

The borrow fee is a direct cost that eats into a short seller's return, and a very high fee forces shorts to be right quickly. For other traders, it is a signal: a rapidly rising borrow fee shows demand to short is outstripping supply, which often accompanies high short interest and is one ingredient traders watch for in potential short squeeze setups.

Borrow costs also leak into options prices. When shares are expensive to borrow, puts tend to be priced higher relative to calls.

Example

A trader shorts 1,000 shares of Northwind Therapeutics (NWTX) at $20, a $20,000 position, with a borrow fee of 36% a year.

• Annual cost: $20,000 x 36% = $7,200
• Daily cost: about $7,200 / 365 = $19.73

Over 30 days the fee totals roughly $590. If NWTX rises to $25, the same rate applied to the larger $25,000 position costs about $24.66 a day. The trader needs the stock to fall about 3% a month just to cover borrowing costs.

FAQ

Do you pay a borrow fee on every short sale?

Generally yes, though for easy-to-borrow stocks the fee can be so small that some brokers do not itemize it.

Why do borrow fees change?

They move with supply and demand for lendable shares. A surge in short selling, a lender recalling shares or a corporate event like a vote can all push fees up quickly.