Early warning in mid-2025: Beginning in July–August 2025, S3 data showed declining borrow availability and rising utilization, an early signal of growing arbitrage-driven short positioning in the ADR.

Borrow stress surfaced before price action: By September, S3 data captured a steady increase in borrow costs alongside high utilization, reflecting crowding in the ADR short as hedge funds scaled India–US arbitrage following the buyback announcement.

Structural impact after the event: Following the mid-December squeeze, short interest declined materially, but availability failed to recover and borrow fees stayed elevated into January, confirming a lasting impairment in lendable supply rather than a transient technical dislocation.

How S3 data revealed the real risks behind the Infosys ADR dislocation.

Through mid-2025, hedge funds accumulated positions in a local-versus-ADR arbitrage, buying India-listed Infosys shares while shorting the US-listed ADR as the preferred hedge given its liquidity, USD settlement, and historically deep borrow. Following the September buyback announcement, this positioning evolved into a buyback-driven trade with added non-acceptance hedging. As exposure grew, S3 data showed rising utilization and declining availability, alongside steadily higher Crowding and Squeeze scores, well before borrow costs moved sharply. Together, these metrics pointed to tightening supply beneath the surface, even as the trade continued to screen as “low risk.”

Once the details of the buyback were announced in September, borrow dynamics shifted. Lending desks began to reassess the value of lending shares that could be removed from the ADR pool to participate in the tender. S3 data reflected this inflection in real time: borrow costs began to rise in September as lenders raised fees, clarified term borrow availability, and reduced lendable inventory, signaling that ADR borrow was becoming scarce.

On December 19th, a rapid tightening in ADR borrow availability after tender settlement reduced the lendable ADR pool appears to have triggered forced short covering and a sharp, non-fundamental squeeze, exacerbated by settlement timing and cross-border frictions. Importantly, S3 data explained not just the squeeze, but its aftermath: despite significant short covering, borrow conditions did not normalize. Elevated utilization and persistently high borrow fees into January reflected a longer-term repricing of lending risk by custodians and prime brokers. Infosys issued a clarification stating there were no material events requiring disclosure, confirming the non-fundamental nature of the move.

This was a securities-lending dislocation that unfolded over months. S3 data highlighted the progression clearly: declining availability in mid-2025, rising borrow costs as arbitrage crowded and supply was removed, and increased squeeze risk. The episode underscores the value of monitoring the full S3 risk framework, squeeze score, borrow supply, utilization, and cost, rather than relying solely on price or short interest.

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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.