TL;DR: Loaning out client securities may screw brokerage clients during financial crises. It’s legal anyway. Do Freetrade do this, or plan to do this as a monetisation method?
Round 3 investor who put in 5,000 quid. I’ve searched the forums 2 times, as well as the Terms & Conditions, but nothing came up in search. Please read the following 2 articles if interested in reading up on what I’m looking for:
Hypothecation = You pledge home for your mortgage from Bank 1
Re-hypothecation = Bank 1 borrowing from Bank 2 and pledging your house for its loan
So What = if Bank 1 blows up, You still lose your house
Re-hypothecation figured prominently in the 2011 MF Global implosion (albeit on futures contracts). But leading stock brokers regularly engage in the practice today, as well.
TD Ameritrade (following Charles Schwab in offering zero-fee) and Interactive Brokers (USD 1 / trade + zero-fee when they launch IBKR Lite) have terms which allow them to do this: the former with margin accounts specifically, and the latter with all accounts, it seems.
Right now, there are 3 primary ways a zero-fee stock broker makes money: 1) selling order flow to market makers / HFTs, 2) interest on client cash, 3) margin fees. In the future, if and when FT enables margin accounts, will it 4) pledge client securities as collateral for its own leverage? So that it can enable proprietary trading?