index minus

In a certain kind of ideal market, securities lending fees should be zero; at any positive price, there would be effectively infinite supply.  In actual practice, a lot of shareholders, for institutional or other reasons, don't lend out their shares.  Those that do lend out shares tend to be price-inelastic, at least above some de minimus price; they'll lend out all of the shares they have available.  Retail borrowers typically don't directly pay a lending fee; they pay it indirectly in various ways, and those ways tend not to respond to the level of the actual fee; if the actual fee is higher than what the broker is getting from the customer, they are simply unable to borrow.  Retail demand, thus, is also very inelastic for most possible prices, but with a dramatic elastic region around a particular price that depends on things like nominal interest rates.

Index investing has grown a lot in the last generation (after growing a lot in the generation before that); a lot of people simply own the S&P 500 in some literal or practical sense.  The saver owns the same fraction of every company in the index.  Some retail investors have, for a while, adopted an "index plus" strategy of putting most of their money in a passive index fund but putting a little bit in stocks that they select.  Increasingly, people are interested in something like an "index minus" strategy; they are largely agnostic about most stocks, except that they think they should own "stocks", but there are a few stocks that they think are overpriced, or think are bad for ESG-related reasons.  My impression is that, at least at the retail level, they mostly end up just buying an ESG fund, or buying an S&P fund and perhaps selling a couple of stocks short, and that that's about the best they can do.

I'm trying to work out in my head whether there's a sensible market for an index minus brokerage-type account; the broker here would guarantee that a customer could in some sense "sell short", but only in the amount that that customer owned the stock.  To the extent that different customers "short" different stocks, part of the custodial assets of the company could be in a Vanguard S&P fund or do something with futures.  To the extent they don't, the company might have to do some of the work of a fund itself,  perhaps including some securities lending, and would have some of the same economies of scale that most mutual funds do.  I think this ends up looking a bit like a subsidy to customers selling hard-to-borrow securities, but the limit on the size of the sale keeps that manageable, and it may be an attractive enough idea to enough people looking to put their money in stocks, many of whom would only sell cheap-to-borrow stocks anyway, that there's a business opportunity to be had here anyway.