Backwardation - Encyclopedia


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BACKWARDATION, or, as it is more often called for brevity, BACK, a technical term employed on the London Stock Exchange to express the amount charged for the loan of stock from one account to the other, and paid to the purchaser by the seller on a bear account (see Account) in order to allow the seller to defer the delivery of the stock. The seller, having sold for delivery on a certain date, stocks or shares which probably he does not possess, in the hope that he may be able, before the day fixed for delivery, to buy them at a cheaper price and so earn a profit, finds on settling-day that the prices have not gone down according to his expectation, and therefore pays the purchaser an agreed amount of interest (backwardation) for the privilege of deferring the delivery, either in order to procure the stock, or else in the hope that there will be a shrinkage in the price which will enable him to gain a profit. (See also Stock Exchange).

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