[zinglersen]

Thanks for sharing your knowledge, it's really interesting! Do you know if margin lending is profitable for the brokers if the borrowed money isn't re-invested? I'm thinking that the 2% is not a lot compared to the cost of providing the service.

[owenversteeg]

You're very welcome! I'm glad someone found it interesting :)

The cost of providing the service isn't huge: there are already systems in place to provide you with money at a broker - the main cost is the systems to automatically sell securities when the value goes down. But that's not _too_ crazy complex.

And it makes a hell of a lot of money. IBKR reported _hundreds_ of millions of dollars of net interest income on customer margin loans in 2019. Those hundreds of millions were made on a net interest margin around 1.7% (an even lower ~1% in 2020!) Traditional loans, people default all the time. But margin loans are collateralized by the securities in the account. For example, you hold 100 shares of Apple in the account, which is the collateral for the margin loan. You can't default: if you try to run away with the cash, well, they have your Apple shares. Really, the only time they lose money is when the value of those securities drops significantly faster than they can sell them, and the borrower racks up a large debt and can't pay it back. But that happens so rarely that the overall program remains very, very profitable.

If you're curious about reading about the times it goes wrong, here's an interesting link [0] describing how users with options lost a lot of money IBKR had to cover - keep in mind that 88MM was what they had to initially cover, and they undoubtedly recovered a lot of that back over time from the borrowing users.

[0] https://www.ft.com/content/01ee0794-158f-40c5-8bb9-82cf5d5f3...

[jjeaff]

It's not the most profitable way to make money as a financial institution. But it is a very safe way since there are basically collateral assets on hand that don't have to be repossessed like a car or home.

This creates a mixed, more diverse portfolio with lower risk.

[owenversteeg]

On the contrary, it is enormously profitable. If a brokerage charges you 3%, their profit is 3% - cost to borrow money for them - any losses. Losses are rare, they occur once in a blue moon when a major market crash happens. The cost to lend money is currently extremely low (fed funds rate is nearly 0), so yes, they're absolutely printing money with their margin loans. To the tune of several hundred million dollars a year for IBKR, actually!