Be Your Own Investment Bank


Your editor is out of the office today. It’s the Melbourne Cup holiday here in Victoria.

But don’t write it off as far as the market goes.

It occurred to me that the race might prove a useful gauge of consumer sentiment. We keep hearing how the Aussie consumer is tapped out from high debts and low wages.

Let’s see how much money punters are prepared to gamble on Australian racing’s biggest day.

If it turns out to be a record breaker, it might be a clue that things are a little better than the mainstream media would have us believe.

We’ll return to that idea tomorrow.

For now, I want to draw your attention to a curious development in financial services. It might even put a few dollars in your pocket in the years ahead…

Calling fund managers, the rich and…eventually, you!

A UK-Israeli start-up has launched a ‘securities lending platform’, according to the Financial Times. The company is called Sharegain.

It’s already attracted a billion dollars in assets.

It wants more.

It’s an all-out grab for a piece of the $US9 billion in revenue this market generates.

These are big figures…

Here’s the story.

Asset managers around the world hold trillions in assets. For example, a passive exchange traded fund (ETF) might hold US$10 billion worth of Apple stock.

Enter a short seller. This is a trader who looks to profit when a stock falls.

He takes the view that Apple is overvalued and due to drop in price. He decides to ‘short sell’ the stock.

Short selling is where you sell the stock first and look to buy it back later, at a cheaper price.

It’s the inverse of the usual process.

But how does our cynical trader sell a stock he doesn’t own?

Why, he borrows it!

In our example, our trader would pay an agreed fee to the ETF that has Apple stock and is prepared to lend it to him.

The short seller keeps paying until he closes out the trade and returns the stock.

If Apple’s share price is lower by then, our short seller can keep the difference between the money he sold the shares for and what they’re worth now.

If Apple’s share price is higher, he must pay out of his own pocket to cover the shares’ increased value.

He has to return the stock, so he must buy it back at some point.

The ETF earns its fee regardless. Not a bad way to boost your revenue, wouldn’t you agree?

This type of asset lending is big business. Blackrock, for example, made nearly $600 million from this last year.

Now, the traditional method of short selling has become walled off from the retail investor — that’s you and I.

However, you can use CFDs to short sell here in Australia.

But you can’t ‘lend’ your shares to earn additional revenue. That’s never been in the picture.

That’s what makes this Israeli platform interesting.

It’s hoping to put YOU in the same position as the ETF…

The potential: An immutable record of
income payments and ownership

Can you see what they’re doing? They’re creating a way to earn income off your existing shareholdings…with little risk if the regulatory framework around it is made secure.

Think of the potential as a way for retirees to earn a little more revenue to supplement their income.

Now, admittedly, these guys are starting with the wealthy investors. They’re looking for investors with over half a million pounds in tradeable assets.

But there’s no reason this couldn’t filter down to smaller accounts, especially if we consider the potential of blockchain technology.

I hold the view that assets like bonds and shares will migrate to blockchains completely within the decade.

This means an immutable record of ownership at all times.

Stay with me here…

Imagine if you took a sample of 1,000 or so self-managed super funds.

You can almost guarantee most of them will have a high weighting to the banking sector and Telstra.

If you could pool these together, you’d end up with a substantial total value.

A hedge fund could borrow off these and pay out a financing fee in proportion to each super fund’s percentage contribution.

The blockchain record would track the movement of the securities, and ‘smart contracts’ could handle the legal prerequisites and covenants.

Now, for the moment, this last part is speculation on my part.

But it’s clear that the cosy world of finance is open to disruption on many fronts over the next 10 years.

Think of the saying attributed to Jeff Bezos: ‘Your margin is my opportunity.’

Entrepreneurs and developers, around blockchain technology and crypto assets especially, can see the financial industry’s huge profits, much of which is from established size and historic market dominance rather than customer service and innovation. They will go after these markets, as will fintech start-ups.

Both will keep attacking these kinds of niches, such as securities lending.

It could potentially throw up some new ways to generate additional income streams.

It won’t all happen tomorrow, but it’s something to watch for. The world sits still for no one — including Wall Street.


Callum Newman Signature

Callum Newman,
Editor, Profit Watch