What is the incentive to a broker who lends a stock to a short seller? He gets a stock back that is of less value and doesn’t have the option to sell it when value starts to decline. I understand there is a fee involved but still doesn’t quite make sense. Does the broker intrinsically beleive wilthe stock l not decrease in value?
why would a market maker provide liquidity? Sell at the ask, buy at the bid. Because he thinks markets will only fluctuate between bid and ask? No. Market makers try to be as market neutral as possible and make money on the bid-ask spread. With reasonable risk management, they can make tons of money without having to predict markets.
The broker doesn’t believe anything about the stock. When you short a stock in your retail account, the broker gets the stock from some client’s margin account (read the fine print on your margin agreement). He lends it to you, and you sell it so he earns a commission on the sale. Then the short proceeds go into an account which you earn some paltry interest rate on while the broker is free to earn some higher rate on it by depositing it in Treasuries. So he earns the interest spread as well. On institutional short sales, there is explicitly a borrow fee (these may be as much as 30-40%). If you sell short, nobody is giving up any options to do anything with the stock you borrowed. They can sell it whenever they want, the can ask for the stock certificate back to put on their desk, the can vote their shares in corporate governance matters. All of these may have an effect on your short position, like it being closed out with no prior notification to you required.
thanks - a helpful explanation to a corp financier who doesn’t really get into this stuff day to day.