How To Turn Off Share Lending On Robinhood

How To Turn Off Share Lending On Robinhood

Robinhood is a trading platform that preaches “investing for everyone”. This has been their method of attracting both experienced and inexperienced traders to acquire stocks on the platform but now, with the share lending feature, otherwise known as “Margin Investing”, a lot of traders now are against the platform’s feature as its logic doesn’t sit well with most. There are a lot of rumors and speculations that the feature makes it possible for the platform to lend out your shares to other non-related traders and investors but are the rumors true?

Robinhood introduced the share lending feature to enable the platform to loan out users’ shares of stocks to unrelated investors and/or firms without being paid interests in return. In fact, the feature is automatically enabled on the application by default but you can disable it if you want to.

A lot of users are against the feature hence they seek steps to turn off the feature. This is why I’ll be discussing the steps to help you successfully turn off share lending on your Robinhood app in this article. 

Can Robinhood Lend Out Your Shares?

How To Turn Off Share Lending On Robinhood

Yes, Robinhood can lend out your shares. But don’t be alarmed as there are ways in which this is done. You’ll need to understand what share lending is to understand what exactly Robinhood does with your shares and if your shares can be lent out to other investors.

Share lending is the process where investment firms like Robinhood loan out shares to borrowing investors, traders, and firms. This is seen as a way to gain additional revenue from stocks that generally would have stayed untraded in their portfolio. 

Short sellers are often the borrowers of the shares as they give collaterals in form of cash or other securities to the lenders. So if your shares are going to be borrowed and given to short-sellers, Robinhood receives collateral on your behalf, to make sure your shares are safe and if not returned, you receive the collateral. Usually, the collateral is approximately equal to the worth of the share lent.

Lenders may include mutual funds, sovereign wealth funds, pension funds, and exchange-traded funds (ETF) providers since these kinds of firms tend to be long-term holders of equities. 

Brokerage firms like Robinhood also participate in share lending with shares in retail investors’ brokerage accounts- this means, the shares in retail investors’ accounts (investors like you) are used to Participate in share lending. The reason why Robinhood does this is that it helps them keep management fees down for their investors, so if your share is lent, your management fee is reduced.

Share lending practices also extend beyond equities to bonds and commodities that’s why the practice is otherwise known as securities lending. This has become more popular recently as price action dipped management fees to near zero and investment firms needed other sources of revenue. The worldwide revenue from security lending totaled to be $7.66 billion in 2020 with a plus of $2.87 billion in broker-to-broker activity, according to DataLend- a financial data firm. 

If you’re an investor shorting a stock, share lending is useful to you because you have to borrow shares in order to put on your bearish positions. Critics believe that the share lending practice comes with a hurt to share fund investors since investment firms forgo their voting rights when they loan out shares. They may also try to own stocks that would be easier to rent out. 

Other concerns that come with this practice include a lack of transparency and an increase in counterparty risks if the trades do not go well as planned.

How Does Share Lending Work?

How To Turn Off Share Lending On Robinhood

Here are more details on how share lending is performed by institutional traders to help you understand how share lending works generally:

  1. Institutional investors use in-house or third-party agents to pair their shares with borrowers. Such agents receive a service charge from the income generated by the loan. 
  2. The fee is agreed upon in advance and tied to how much demand there is for the lent out security
  3. The institutional investor or lender reinvests the collateral in order to grab additional interests or income while their shares are out on loan
  4. Borrowers may include other banks, hedge funds, broker-dealers, as well as other leading agents. When the borrower is done using the shares, they are returned back to the lender.
  5. If the collateral given is in the form of cash, a proportion of the income earned from reinvesting is sometimes provided back to the borrower.

For retail investors like yourself, it is easier to perform share lending with Robinhood. Here’s how share lending works on Robinhood:

  1. Robinhood gathers and pairs shares being held by retail investors like yourself to retail investors who need to borrow shares.
  2. The shares are lent with collateral given in cash or stock by the borrower. 
  3. The whole process is initiated and monitored by Robinhood.
  4. Keep in mind that this may happen without your attention since you are a holder of the particulars share being lent out.
  5. Robinhood reinvests the collateral to grab additional interest while the shares are out on loan.
  6. Borrowers include retail investors just like you.
  7. If the collateral given is in the form of cash, a proportion of the income earned from reinvesting is not provided back to the borrower but maintained by Robinhood.

These steps are how Robinhood initializes share lending (margin investing). This shows you what exactly happens when your shares are lent out to retail investors practicing marching investing. Now you can choose to leave the share lending (margin investing) feature on your account or to turn it off 

How To Turn Off Stock Lending (Margin Investing)

How To Turn Off Share Lending On Robinhood

Here’s how to disable margin investing (share lending) on Robinhood’s mobile app:

Step 1: Log In To The Application

Open the application on your android device or iOS device to log in and access the application.

Step 2: Tap The “Account” Button

Tap the account button found on the bottom-right corner of the screen. You’ll be welcomed with a menu. 

Step 3: Tap “Settings”

Select the settings option to access your account settings. You’ll be welcomed with a list here. you’ll find your account details and account settings you may want to change.

Step 4: Select “Robinhood Gold”.

Choose Robinhood Gold from the list. Your account should be a Robinhood Gold account.

Step 5: Tap “Margin Investing”.

Select margin investing at the top of the menu list presented to you. You’ll be led to a new page.

Step 6: Tap “Disable Margin Investing”.

Since you’re looking to disable share lending, tap on disable margin investing.

Step 7: Go back to the “Account” screen.

Navigate back to the general “account” screen, the screen where you chose to go to the settings.

Step 8: Go to the “Investing” menu.

Navigate to the investing menu just like you’re going to place a trade or buy a share. 

Step 9: Tap “Day Trade Settings”.

When you get to the “investing” menu, you’ll be welcomed with a list, now choose the “day trade settings” from the list.

Step 10: Disable “Instant Settlement”.

After opening the “day trade settings” from the list, disable the “instant settlement” option. This puts off instant settlement for you.

It’s important to note that only Robinhood Gold account holders can disable the share lending. However, all accounts can disable instant settlement which should also prevent Robinhood from performing share lending with your shares but the outright steps to disable share lending are only allowed with paying Robinhood Gold accounts.

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