We follow almost 9,500 non-ETF domestic equities on a daily basis with $753 billion worth of short interest. These stocks have an average fee to short sellers of 0.84% fee and an average 7.15% Short Interest % of Float.
Stock Borrow Fee: The annualized stock borrow fee charged by brokers to short sellers. Short sellers pay a fee to borrow stock to cover the settlement of their short sales. Stock loan is a supply\demand market; if supply gets tight or demand spikes borrow fees are bound to go up.
The U.S. traded stocks with the most expensive stock borrow fees (min short int $100 mm):
Stock Borrow Fee Change: A sudden and large increase in stock borrow fee can trigger short squeezes as the cost to keep a short open just becomes too onerous. Shorts with a one week +10% increase in stock borrow fees and Spot fees that are appreciably higher than current Borrow fees are indicative of short squeeze candidates.
The U.S. traded stocks with the largest increase in stock borrow fees (min short int $100 mm):
High stock borrow fees have a negative impact to Alpha, slowly and insidiously eating away at accumulated profits. We only have one stock with over $1 million daily stock borrow costs/day in Match Group (MTCH), and shorts are down -$307 million in mark-to-market losses for the year, 22.5% of which is -$69 million of year-to-date stock borrow costs. Cannabis shorts continue to pay high stock borrow costs to hold onto their short exposure as Tilray (TLRY), Aphria (APHA), Aurora Cannabis (ACB) and Canopy Growth (CGC) in the top 25.
Daily Financing Costs: The daily cost to borrow stock is the $ Notional of the short position * Stock Borrow Fee / 360 days. The amount of total daily financing costs depends on the size of the short, stock price and stock borrow fee.
The U.S. traded stocks with the largest daily stock borrow expense (minimum short interest $100 mm):
Besides their cost, some shorts are very crowded and difficult to get into. Most of these stocks are long-time shorts, but due to their high SI % of Float there is less of a chance that there will any significant amount of additional short selling in these stocks due to lack of stock loan supply. Any compelling downward price movement in these stocks will be due to long selling and not short selling. All these stocks still have some stock borrows available, but if short activity continues, we should see rates increase at a much quicker pace and recalls starting to hit the street.
Short Interest as a % of Float: The total number of shares shorted divided by the company’s float. SI % of Float usually tops out at the 40% to 60% range due to lendability constraints.
The U.S. traded stocks with the highest Short Interest as a % of Float (minimum short interest $100 mm):
Short sellers must take into consideration the cost of the underlying stock borrow as well as the Short Interest as a % of Float when making their short investment decisions. High stock borrow costs can eat into expected Alpha making an attractive trade fall below investment thresholds. Or an unexpected increase in stock borrow rates can turn a home-run trade into a run of the mill single.
High daily financing costs hit a short seller’s bottom line directly, if a stock’s price plateaus the trader will be seeing red financing numbers that are not being offset by daily mark-to-market profits. If these financing costs are not accounted for properly on a daily basis, what may look like a profitable trade may in actuality be a loser.
When sorting through short side candidates a quick look at SI % Float can determine whether a potential investment is early or late to the trade. If SI % Float is already high, the trade is already relatively crowded there may a sudden and dangerous stampede for the exits if the stock rallies. A low SI % Float may indicate that the investor is early to the game and is able to covertly build a position and sample most of the early Alpha exclusively.
Using our Black App or our Blacklight SaaS platform, a trader can see up-to-date short interest, stock borrow fees\cost and SI % Float, to get a leg up on the competition and get in or out of trades before the herd.
Want deeper insight into the above analysis?
Contact: Ihor.Dusaniwsky@S3Partners.com
Managing Director Predictive Analytics, S3 Partners, LLC
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The information herein (some of which has been obtained from third party sources without verification) is believed by S3 Partners, LLC (“S3 Partners”) to be reliable and accurate. Neither S3 Partners nor any of its affiliates makes any representation as to the accuracy or completeness of the information herein or accepts liability arising from its use. Prior to making any decisions based on the information herein, you should determine, without reliance upon S3 Partners, the economic risks and merits, as well as the legal, tax, accounting and investment consequences, of such decisions.
