Short interest in the European market decreased by -$33.4 billion, or -11.9%, to $247 billion in the second quarter of 2022. The decrease in short interest was mainly due to a down-trending market in the second quarter with the Stoxx Europe 600 -10.67%. The $33.4 billion decrease was made up of -$52.0 billion in shorted share price decreases which was partially offset by +$18.6 billion of increased short selling. Short sellers increased the amount of shares shorted to offset the decrease in the value of their short positions as stock prices declined, but unlike the first quarter the additional short selling did not offset the total decline in market value of the shorted securities. In the first quarter we saw short sellers replenish four times the value of mark-to-market declines but only a third of second quarter mark-to-market declines. Shorts actively built up their exposure in the first quarter but were willing to let exposure wane in the second quarter.

There were only two sectors with a second quarter increase in short interest, Energy (+$2.01 billion) and Misc. (SPACs) (+$0.7 million). The sectors with the largest decrease in short exposure were Financials (-$13.2 billion) and Consumer Staples (-$5.4 billion). This is a major quarterly reversal for the Financial sector as it had the largest increase of short interest in the first quarter (+$19.9 billion).

Short exposure continues to be concentrated in several sectors: Industrials ($44.9 billion), Financials ($43.3 billion) and Consumer Discretionary ($35.1 billion).

Short Interest by European Sector

Market wide Short Interest as a % of Float increased in the second quarter with average SI % Float climbing 0.44% to 4.62% and the average S3 SI % Float, which includes the synthetic long shares created by every short sale in the denominator, by 0.39% to 4.25%.

There were two sectors with larger than average increases with Energy up +1.86% and Real Estate up +1.69%. And only one sector with a larger than average decrease, Utilities down -1.69%.

Stocks with over $50 million of short interest with the largest increase in SI % Float were: Samhallsbyggnadsbolaget i Nordon AB (SBBB SS) +17.32% to 27.00%; Swisscom AG (SINCH SS) +9.76% to 20.28%; Frontline Ltd (FRO NO) +9.34 to 13.63%; PostNL NV (PNL NA) +8.66% to 17.73%; and Volvo Car AB B (VOLCARB SS) +7.77% to 12.52%.

Stocks with over $50 million of short interest with the largest decrease in SI % Float were: Air France-KLM (AF FP) -15.14% to 4.00%; Swisscom AG (SCMN SW) -6.36% to 1.63%: Naturgy Energy Group SA (NTGY SM) -5.84% to 18.24%; Elekta AB B (EKTAB SS) -5.78% to 12.06%; and Alphawave IP Group PLC (AWE LN) -5.47% to 20.82%.

Traditional Short Interest vs. S3 Short Interest

Short sellers found it more expensive, on average, to short stocks in the second quarter with the average stock loan fee increasing +0.09% from 0.70% fee to 0.79% fee. The Real Estate (+0.31% to 0.97% fee) and Health Care (+0.24% to 0.92% fee) sectors had the largest increase in average stock borrow fees while Energy (-0.09% to 0.54% fee) and Utilities (-0.05% to 0.73% fee) were the only two sectors that had a decrease in average stock borrow fees.

Stocks with over $50 million of short interest with the largest increase in stock borrow fees were: CureVac NV (5CV GR) +31.75% to 40.50%; Varta AG (VAR1 GR) +25.25% to 40.00%; SMA Solar Technology AG (S92 GR) +11.00% to 13.75%; Konton AG (KTN GR) +8.50% to 22.25%; and Volvo Car AB B (VOLCARB SS) +6.25% to 8.25%.

Stocks with over $50 million of short interest with the largest decrease in stock borrow fees were: Air France KLM (AF FP) -15.25% to 1.75%; NEL ASA (NEL NO) -5.00% to 6.00%; CEZ AS (CEZ PW) -3.75% to 6.25%; Tui AG (TUI LN) -1.25% to 3.50%: and Tui AG (TUI1 GR) -1.00 to 3.50%.

Borrow Fees by European Sector

Overall short sellers paid $505 million in stock borrow fees in the second quarter of 2022 (calculated daily borrow cost using S3’s daily offer rate and daily shares shorted numbers) versus $421 million in the first quarter. The ten stocks that short sellers had the most conviction and paid the most to short made up 18% of the total borrow cost in the quarter.

European Stocks with the Highest Borrow Costs

High stock borrow fees can test the conviction level of short sellers as financing costs can take a large bite out of expected Alpha. The highest stock borrow fees, as of June 30, for stocks with over $50 million of short interest are below.

European Stocks with Highest Stock Borrow Fees*

*With over $50 million of short interest

Short sellers were up $51.96 billion in second quarter net-of-financing mark-to-market profits, up +19.70% versus up +$23.73 billion, +9.98%, in the first quarter. With the Stoxx Europe 600 down -10.67% for the quarter, short sellers again outperformed the market significantly.

There were 4,133 shorted equities with positive P\L, producing +$54.30 billion in mark-to-market profits, +23.10%. The five largest short-side winners in the second quarter were: AXA SA (CS FP) +$$1.22 billion +27.26%; Schneider Electric SE (SU FP) +$1.10 billion +37.22%; Mercedes-Benz Group AG (MBG GR) +$973 million +19.93%; Allianz SE (ALV GR) +$745 million +24.40%; and Roche Holding AG (ROG SW) +$737 million +24.19%.

There were 801 shorted equities with negative P\L, producing -$2.34 billion in mark-to-market losses, -7.09%. The five largest short-side losers in the second quarter were: Saipem SPA (SPM IM) -$294 million -124.82%; Prosus NV (PRX NA) -$239 million -69.83%; TotalEnergies SE (TTE FP) -$196 million -1.63%; Deutsche Telekom (DTE GR) -$103 million -3.64%; and Swedish Match AB (SWMA SS) -$96 million -35.31%.

There were more profitable shorts than unprofitable shorts in the first quarter with 73% of all short positions adding positive numbers to a trader’s bottom lines, 14% with negative numbers and 13% were flat for the quarter.

Every sector except Misc. (SPACs) was net profitable on the short side with the most profitable sectors being Real Estate (+40.82%); Information Technology (+28.99%); and Industrials (+24.76%) while the least profitable shorted sectors were Misc.-SPACs (-0.09%); Energy (+1.16%); and Communication Services (+10.86%). This was the second quarter in a row that Consumer Discretionary led the most profitable sector league table.

Short Selling P&L by European Sector