Prime brokerage transactions: Difference between revisions

The business of getting a [[broker/dealer]], being a chap with excellent connections to the market and access to all the best juicy sources of liquidity, to buy or sell shares for you. This is exactly the same idea as when you sell buy or shares through — er — RobinHood (remember them?) or eToro: all that differs is the scale and volume. You give an order, the [[broker]] executes it, you are the proud owner of — or no longer the proud owner of — the shares.

In order to ''buy'' that share in the shop window, at which you’ve been gazing longingly each day as you pass on your way to and from work, you want to ''borrow'' some money. Good news: your [[broker]] — whom we will now call a [[Prime broker|“prime” broker]] — will ''lend'' you the wedge.  

But there’s a catch: ''first'', you have to pony up “[[margin]]”, and if the stock drops in value, you’ll have to pony up ''more'' —and ''second'', you need to give your new shares to the [[prime broker]] so the prime broker can ''play with them''. It does this to offset its costs of lending the money to you in the first place. Don’t fret: it will give them back if you want to sell them.

So imagine you want to ''sell'' a share, because you think it is rubbish, but you don’t own it. An [[GameStop|antediluvian, mall-based, physical retailer of computer games]], for example. It’s trading at bugger all, it is unsalvageable, and it is totally free money betting against it.<ref>You will not the irony here, won’t you.</ref> If only you could sell it, but not have to buy it first, you could make money if the share went down in value. This is like the ''opposite'' of investing in a share. What you need is someone who will let you ''borrow'' a security they own, that you can sell. When, as you are certain it will, it plummets in value, you can buy another one in the market at the new low price, give it back to your friend, and everyone is happy! You have made a bucket! What could possibly go wrong?

That friend is your [[prime broker]]. But, again, there is a catch. What if the share goes ''up'' in value? Your prime broker will want [[margin]] to cover against that risk. The more it goes up, the more you have to pay. And it will make you give it the proceeds of sale of the shares to look after for you, as margin, and, to reduce that financing cost.