Recent trading in Trump Media & Technology Group Corp (DJT) has highlighted the effect stock borrow costs can have on the profitability of short selling with stock borrow rates on existing DJT short positions hitting the 565% fee level and the stock borrow fee on new DJT stock borrows to settle new short sales ranging from 700% to 900% fee.

As expected, DJT is the most expensive stock borrow for stocks with over $50 million of short interest. Using a $50 million short interest floor eliminates outlier rates from smaller cap stocks and\or very small stock borrows.

DJT short sellers have been paying an average of $4 million of daily financing costs since March 28th which has offset almost half of the $64 million of mark-to-market profits they earned over that time period.

Since DJT\DWAC’s inception in 2021, short sellers are down -$207 million in net of financing mark-to-market losses which consists of -$19 million in mark-to-market losses and -$188 million of stock borrow financing costs. Even in the profitable trading year of 2022 when short sellers earned $121 million in mark-to-market profits, the -$129 million of stock borrow financing costs turned the year negative.

It is obvious that monitoring stock borrow financing costs is a key component of portfolio management. While 94% of all dollars shorted are in G.C. stocks (General Collateral or the easiest to borrow stocks with the cheapest stock borrow rates) only 45% of all securities that are shorted fall in the G.C. category.

The smaller, and possibly more risky and potentially more rewarding trades, on the short side have a larger proportion if non-G.C. stocks than the larger more crowded short trades. 68% of all shorts with less than $50 million of short interest are non-G.C. while only 11% of shorts with over $50 million of short interest are non-G.C.

While the larger more vanilla beta and hedging shorts (S&P 500 stocks, larger cap stocks, etc.) are usually G.C. and require minimal monitoring, the volatile, high risk, high reward shorts at the tail end of the stock borrow financing spectrum need constant oversight.

But short sellers are compensated for the extra effort with higher net-of-financing returns. Short sellers of G.C. stocks have a negative -6.38% return in 2024 while non-G.C. short sellers have a positive 1.54% return even after paying higher stock borrow financing rates.

Portfolio management does not end with stock selection and portfolio weightings, daily financing oversight is needed to ensure trades are profitable not only on a mark-to market basis but also on a net-of-financing basis. And with many of the higher return trades in the less crowded non-G.C. universe, peer outperformance relies on managing the risks and costs of those trades on a daily basis.

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