Most broker agreements allow them to lend out your shares without your consent or knowledge. It actually works against the long stock holders, but it does help brokers to lower their customers' transaction fees.
Even worse is Naked Short Selling, a practise where short sellers don't borrow the shares in the first place. This artificially creates shares and dilutes the value of the stock being shorted. Although illegal since Reg SHO was introduced, it still goes on due to lack of enforcement and comically low fines - google "Reg SHO Violations".
Some public pension funds forbid the lending of the shares they own for shorting. The minimal interest gained by lending shares is not worth the downward pressure to the stock price created by the short which undermines the asset value.
> Most broker agreements allow them to lend out your shares without your consent or knowledge.
This is straddling the line between completely untrue and highly misleading. For cash accounts, brokers cannot lend your shares without a written agreement allowing it. Although the standard agreement could include agreeing to a securities lending program, this is not common in retail brokerage contracts. Additionally, even if that clause was in your contract, they have to notify you whenever they lend your shares. That right to notification CANNOT be waived in the agreement. So if you have a cash account, no one is lending your shares without your knowledge, period.
Even for margin accounts, the same requirements hold for fully paid securities. So if you have a margin account, but you're not actually borrowing any money, no one is lending your shares without your knowledge.
The only case where your broker might lend your securities without your knowledge is when you have a margin account and you are actually borrowing money.
You didn't mention whether it was a cash account or a margin account, or if there's an exception for fully paid securities. If it's a margin account, that is indeed how it works for non-fully paid securities. If it's a cash account, or there's no exception for fully paid securities, regulators will probably not view that agreement favorably. You can file a complaint at https://www.sec.gov/complaint/tipscomplaint.shtml. In my experience, they actually read and act on complaints. (Well, at least small easy to investigate ones... ones requiring a lot of investigatory work like the Madoff case are a different story.) The relevant regulation is 17 CFR §240.15c3-3, paragraphs b(1), b(3), and b(3)ii. (http://www.ecfr.gov/cgi-bin/text-idx?SID=f07570958d348a3f75d...)
> even if that clause was in your contract, they have to notify you whenever they lend your shares. That right to notification CANNOT be waived in the agreement.
>> The minimal interest gained by lending shares is not worth the downward pressure to the stock price created by the short which undermines the asset value.
yes - if someone wants to borrow, shouldn't the lender demand a fee? At many brokers there is a program to route a portion of that interest back to the client.
also - the interest rate is often negative : ie the lender PAYS THE BORROWER to take the shares. The borrower posts cash collateral that the lender gets to earn interest on...
The pension fund thing is interesting, because interest on shares is linear with respect to number lent, while downward pressure on asset price is quadratic (number of shares * per-lending downward pressure).
Even worse is Naked Short Selling, a practise where short sellers don't borrow the shares in the first place. This artificially creates shares and dilutes the value of the stock being shorted. Although illegal since Reg SHO was introduced, it still goes on due to lack of enforcement and comically low fines - google "Reg SHO Violations".
Some public pension funds forbid the lending of the shares they own for shorting. The minimal interest gained by lending shares is not worth the downward pressure to the stock price created by the short which undermines the asset value.
https://en.wikipedia.org/wiki/Naked_short_selling
https://en.wikipedia.org/wiki/Failure_to_deliver