Lyft Inc (LYFT) has declined by over 10% and below its $72 IPO price in mid-day trading due primarily to long shareholder selling and not short selling.
With IPO shares not settled yet and therefore not physically in stock lending programs, and SEC regulations prohibiting IPO underwriters from lending out their shares to cover short sales for 30 days only a small fraction of the 34 million shares traded so far today are the result from short sales.
Reg SHO stipulates that broker-dealers can offer short locates if they reasonably believe that the security can be borrowed and delivered to facilitate the underlying short sale delivery. Since there are no physical LYFT shares to borrow, brokers are approving short sales today on the anticipation that either they will have internal lendable inventory coming from long customer margined\rehypothecated shares that will settle shortly and stock loan allocations from institutional stock lending programs.
In either case, brokers are usually very conservative on pre-IPO settlement short sale locates in order to minimize their future stock loan exposure by approving the bare minimum of short sales to keep clients happy, but not run afoul of Reg SHO on settlement date. When the LYFT IPO shares begin settling tomorrow and lending programs see their lendable inventories grow, over the next several days we should see a dramatic increase in stock lending, short sale approvals and LYFT short selling.
LYFT stock is down over 10% today with minimal short side activity, we can expect further price weakness when the shorts are allowed to put the pedal to the metal and redline their trading strategies. As more stock becomes available to lend and more short sales are executed we should see overall short interest to increase and stock borrow rates to be become more expensive as most of the initial lendable inventory gets taken down quickly. But with most of LYFTâ€™s stock locked up, internally held or held in non-margined retail hands, a less than average portion of its 32.5 million share float will be able to be used to cover short sales. There is a good chance that stock borrow rates will top 10% fee right from the start if short demand continues to be strong.
LYFT stock borrow rates and availability should remain volatile until next week when the dust of the initial transactions settles, until then, buckle your seat belts.
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Managing Director Predictive Analytics, S3 Partners, LLC
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