Short interest in the domestic market decreased by -$132.3 billion, or -12.3%, to $943 billion in the second quarter of 2022. The decrease in short interest was due to a down-trending market in the first quarter (S&P 500 down -16.45%, Nasdaq down -22.44% and Russell 3000 down -17.03%). The $132.3 billion decrease was made up of -$224.0 billion in shorted share price decreases, which was partially offset by +$91.7 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 for the second quarter in a row 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 61% of mark-to-market declines but only 41% of second quarter mark-to-market declines.

The sectors with the largest decrease in short exposure were Information Technology (-$40.7 billion) and Consumer Discretionary (-$32.7 billion). Both Information Technology and Consumer Discretionary were two of the three sectors with the largest decreases in the first quarter of 2022 as well. Only two sectors had an increase in short exposure in the second quarter, short interest in the Utilities sector was up +$815 million and the Consumer Discretionary sector was up +$748illion.

Short exposure continues to be concentrated in several sectors: Information Technology ($180 billion), Consumer Discretionary ($147 billion) and Health Care ($125 billion).

Short Interest by Sector

Market wide Short Interest as a % of Float remained steady in the second quarter with SI % Float staying at 4.90%. The S3 SI % Float, which includes the synthetic long shares created by every short sale in the denominator, rose slightly, + 1 bp, over the quarter, from 4.43% to 4.42%.

Although the overall market did not have a change in SI % Float we do see particular sectors or stocks that did have increases or decreases in the second quarter.

There were two sectors with larger than average increases with Health Care up +0.39% and Financials up +0.37%. And only two sectors with larger than average decreases with Misc. (SPACs) down -2.73% and Communication Services down -0.81%.

Stocks with over $50 million of short interest with the largest increase in SI % Float were: Veru Inc (VERU) 4.48% to 33.20%; SpringWorks Therapeutics (SWTX) 13.55% to 36.09%; Adicet Bio (ACET) 4.47% to 26.02%); WeWork Inc (WE) 16.65% to 37.21%; and Coinbase Global (COIN) 4.24% to 21.94%.

Stocks with over $50 million of short interest with the largest decrease in SI % Float were: Samsara Inc (IOT) 45.92% to 17.85%; GoGo Inc (GOGO) 27.60% to 10.72%; Warner Bros Discovery (WBD) 23.33% to 2.81%); iStar Inc (STAR) 27.41% to 8.27%; and Gitlab Inc (GTLB) 31.60% to 15.33%.

Traditional Short Interest versus S3 Short Interest

Short sellers found it more expensive, on average, to short stocks in the first quarter with the average stock loan fee increasing +19 bps from 0.76% fee to 0.95% fee. The Misc. (SPACs) and Communication Services had the largest decrease in stock borrow fees. Communication Services and Consumer Discretionary had the largest increase in stock borrow fees.

In the Misc. (SPACs) sector we saw DWAC’s borrow fee fall from 71.82% to 52.32% fee, PRPB fall from 4.57% to 1.70% fee and AAC fall from 2.07% to 0.30% fee.

In the Communication Services sector we saw AMC’s borrow fee climb from 1.32% to 17.07% fee, SIRI increase from 5.82% to 7.32% fee and BBIG jump from 49.57% to 166.82% fee.

In the Consumer Discretionary sector we saw GME’s borrow fee increase from 8.07% to 19.07% fee, LCID increase from 9.32% to 19.07% fee and FSR jump from 7.07% to 20.82% fee.

Borrow Fees by Sector

Overall short sellers paid $1.97 billion 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 $1.69 billion in the first quarter. The ten stocks that short sellers had the most conviction and paid the most to short made up 17% of the total borrow cost in the quarter. The stocks with the largest quarterly short financing costs were: GME (-$80mm), LCID (-$61mm), BYND (-$45mm), UPST (-$40mm), BRCC (-$37mm), DWAC (-$33mm), RDBX (-$32mm), BROS (-$29mm), SAVA (-$27mm) and SG (-$26mm).

Even after paying away $80 million in stock borrow financing costs, Gamestop Corp (GME) short sellers still ended up +$452 billion in net-of-financing profits, up +24.56% for the quarter. But sometimes high financing costs can turn a winner into a loser. BRC Inc (BRCC) shorts paid $37 million in stock borrow costs which turned $34 million in mark-to-market profits into a net -$3 million loser, -6.08%, for the quarter.

Unfortunately, high financing fees can exacerbate poor returns. Redbox Entertainment (RDBX) shorts were down $15 million in first quarter mark-to-market losses but added $31 million of quarterly financing costs to push their net-of-financing mark-to-market losses to -$46 million, down -19.35% on an average short interest of $23 million. The same could be said for Vertex Energy (VTNR) shorts ($9 million financing costs, $29 million mark-to-market losses, -$38 quarterly loss, -23.78%) and Arch Resources (ARCH) shorts ($6 million financing costs, $77 million mark-to-market losses, -$83 quarterly loss, -12.31%).

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 March 31st, for stocks with over $100 million of short interest were:

Stocks with the Highest Borrow Fees*

*with at least $100mm in short interest

Short sellers were up $224.6 billion in second quarter net-of-financing mark-to-market profits, up +22.24% versus up +$85.45 billion, +7.92%, in the first quarter. With the Russell 3000 down -18.30% for the quarter, short sellers again outperformed the market significantly.

There were 13,395 shorted equities with positive P\L, producing +$235.6 billion in mark-to-market profits, +27.07%. The five largest short-side winners in the fourth quarter were: TSLA (+$10.02bn +47.47%), AMZN (+$4.54bn +41.27%), AAPL (+$4.07bn +24.59%), NVDA (+$3.40bn 60.69%) and SQ (+$3.30bn +79.81%).

There were 3,980 shorted equities with negative P\L, producing -$11.1 billion in mark-to-market losses, -8.48%. The five largest short-side losers in the fourth quarter were: PDD (-$398mm -43.44%), LI (-$360mm -43.44%), BABA (-$283mm -7.24%), IBM (-$227mm -8.10%) and FUTU (-$194mm -54.47%).

There were more profitable shorts than unprofitable shorts in the first quarter with 71% of all short positions adding positive numbers to a trader’s bottom lines, 21% with negative numbers and 8% were flat for the quarter.

Every sector was net profitable on the short side with the most profitable sectors being Consumer Discretionary (+29.83%), Information Technology (+29.59%) and Materials (+27.19%) while the least profitable shorted sectors were Utilities (-+6.32%), Consumer Staples (+7.18%) and Energy (+9.58%). This was the second quarter in a row that Consumer Discretionary led the most profitable sector league table.

Short Selling Profitability by Sector