And then there were none. McDermott Intl (MDR) and Clovis Oncology (CLVS) stock borrow fees were both over 100% last month, but now the most expensive domestic stock borrow rates are not even topping 70% fee. CLVS rates have nosedived from 108% fee as recently as January 9th to 2.54% fee today as 4.72 million short shares, 18% of total short sales, were covered in January. While McDermott Intlâ€™s stock borrow fee is 233% fee, the stock has entered bankruptcy, ticker is now MDRIQ, and its short interest has fallen beneath our $50 million threshold. Stocks with strong upwards rate pressure are Inmode Inc (INMD), GTT Communications (GTT), SmileDirectClub Inc (SDC) and Tanger Factory Outlet Centers (SKT). We can expect stock borrow rates in these names to climb significantly in the short term.
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 $50 mm):
High stock borrow fees have a negative impact to Alpha, slowly and insidiously eating away at accumulated profits and like a strong armed outfielder, turning triples and doubles into singles.
Canopy Growth (CGC) and Tanger Factory Outlet Centers (SKT) short sellers continue to pay over $1 million/day in stock borrow fees, but short sellers continue to hold onto their positions in spite of their expensive short financing costs. With both stocks also rallying in 2020, there is a higher chance of a short squeeze in both these names with high stock borrow costs adding to the pain of large mark-to-market losses. Peloton Interactive (PTON) is just under $1 million/day in stock borrow financing costs, if short selling continues at its current pace daily borrow costs should top the $1 million/day mark in the next week or so.
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 $50 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 a very small 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. Health Insurance Innovations (HIIQ) joins Gamestop Corp (GME) and Peloton Interactive (PTON) as domestic stocks with over 70% Short Interest % of Float. All three stocks still have stock borrows available, but if short activity continues, we should see rates increase at a much quicker pace and recalls to start hitting the street.
Short Interest as a % of Float: The total number of shares shorted divided by the companyâ€™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 $50 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 sellerâ€™s bottom line directly, if a stockâ€™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.
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Managing Director Predictive Analytics, S3 Partners, LLC
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