Short interest in the domestic market decreased by -$54.3 billion, or -5.8%, to $888 billion in the third quarter of 2022. The decrease in short interest was due to a down-trending market in the first quarter (S&P 500 down -5.28%, Nasdaq down -4.11% and Russell 3000 down -4.85%). The $54.3 billion decrease was made up of $53.7 billion in shorted share price decreases with an addition of $544 million of short covering.

In July, Short sellers were actively trimming their short exposure, with buy-to-covers in all sectors, into still weakening markets anticipating a market floor. August saw continued, albeit less aggressive, buy-to covers as markets did begin to climb. And in September we saw a total about face with $28.5 billion of new short selling, offsetting the nearly $28 billion of short covering we saw in the previous two months.

The sectors with the largest decrease in short exposure were Information Technology (-$14.9 billion), Communication Services (-$9.5 billion) and Consumer Discretionary (-$9.0 billion). Only two sectors had an increase in short exposure in the third quarter, short interest in the Energy sector was up +$2.6 billion and the Misc. (SPACs) sector was up +$100 million.

Short exposure continues to be concentrated in several sectors: Information Technology ($164 billion), Consumer Discretionary ($138 billion) and Health Care ($124 billion).

Short Interest Changes by Sector

Market wide Short Interest as a % of Float remained steady in the third quarter with SI % Float declining by two basis points to 4.88%. The S3 SI % Float, which includes the synthetic long shares created by every short sale in the denominator, declined by one basis point over the quarter, from 4.42% to 4.41%.

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. Increases in SI % Float indicates more shares being shorted in a stock or sector while decreases indicate fewer shares being shorted.

There were two sectors with larger than average increases with Health Care up +0.44% and Energy up +0.37%. And two sectors with larger than average decreases with Misc. (SPACs) down -1.82% and Real Estate down -0.52%.

Stocks with over $100 million of short interest with the largest increase in SI % Float were: GlobalFoundries Inc (GFS) 2.41% to 18.78%; Revolve Group Inc (GVLV) 17.34% to 31.27%; Asana Inc (ASAN) 17.60% to 31.32%; iRobot Corp (IRBT) 13.51% to 23.81%; and Figs Inc (FIGS) 12.39 to 22.46%.

Stocks with over $100 million of short interest with the largest decrease in SI % Float were: Coherent Corp (COHR) 18.55% to 5.06%; SpringWorks Therapeutics Inc (SWTX) 35.41% to 21.96%; HashiCorp Inc (HCP) 21.85% to 16.35%; Relay Therapeutics Inc (RLAY) 27.08% to 16.35%; and American Eagle Outfitters Inc (AEO) 19.95% to 11.36%.

Short Interest % of Float by Sector

Short sellers found it more expensive, on average, to short stocks in the first quarter with the average stock loan fee decreasing +27bps from 0.95% fee to 0.68% fee. There was only one sector, Information technology, which had an increase in average stock borrow fees (by 2 bps). Misc. (SPACs) and Consumer Staples had the largest decrease in stock borrow fees.

In the Information Technology sector we saw RIOT’s borrow fee climb from 2.57% to 17.07% fee, HIVE increase from 4.32% to 18.07% fee and MSTR jump from 7.82% to 21.322% fee.

In the Misc. (SPACs) sector we saw DWAC’s borrow fee fall from 52.57% to 41.57% fee, BLSA fall from 3.57% to 0.30% fee and ARYD fall from 8.57% to 6.32% fee.

In the Consumer Discretionary sector we saw REV’s borrow fee decrease from 793.57% to 92.32% fee, BRCC decrease from 114.57% to 30.57% fee and BYND decrease from 48.82% to 20.82% fee.

Borrow Fees by Sector

Overall short sellers paid $2.12 billion in stock borrow fees in the first quarter of 2022 (calculated daily borrow cost using S3’s daily offer rate and daily shares shorted numbers) versus $1.97 billion in the second quarter. The ten stocks that short sellers had the most conviction and paid the most to short made up 23% of the total borrow cost in the quarter. The stocks with the largest quarterly short financing costs were: GME (-$108mm), BYND (-$80mm), LCID (-$75mm), AMC (-$39mm), UPST (-$37mm), SIRI (-$35mm), SAVA (-$34mm), BROS (-$29mm), FFIE (-$25mm) and FAZE (-$24mm).

Even after paying away $108 million in stock borrow financing costs, Gamestop Corp (GME) short sellers still ended up +$109 million in net-of-financing profits, up +6.15% for the quarter. But sometimes high financing costs can turn a winner into a loser. Faze Holdings Inc (FAZE) shorts paid $24.2 million in stock borrow costs which turned $ 3.3 million in mark-to-market profits into a net -$21 million loser, -115.9%, for the quarter.

Unfortunately, high financing fees can exacerbate poor returns. Casava Sciences Inc (SAVA) shorts were down $190 million in first quarter mark-to-market losses but added $34 million of quarterly financing costs to push their net-of-financing mark-to-market losses to -$224 million, down -72.0% on an average short interest of $312 million. The same could be said for Revlon Inc (REV) shorts ($19 million financing costs, $1 million mark-to-market losses, $20 million quarterly loss, -111.27%) and EVGO INC (EVGO) shorts ($19 million financing costs, $50 million mark-to-market losses, -$69 quarterly loss, -35.51%).

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 September 30, for stocks with over $100 million of short interest are below.

Stocks with the Highest Borrow Fees

Short sellers were up $40.8 billion in third quarter net-of-financing mark-to-market profits, up +4.46% versus up +$224.6 billion, +22.24%, in the second quarter. With the Russell 3000 down -4.85% for the quarter, short sellers again outperformed the market significantly.

There were 10.318 shorted equities with positive P\L, producing +$82.79 billion in mark-to-market profits, +13.63%. The five largest short-side winners in the fourth quarter were: BABA (+$1.62bn +34.62%), CHTR (+$1.38bn +40.02%), MMM (+$1.12bn +37.15%), MSFT (+$0.98bn +9.47%) and V (+$0.87bn +11.95%).

There were 6,513 shorted equities with negative P\L, producing -$42.08 billion in mark-to-market losses, -11.35%. The five largest short-side losers in the fourth quarter were: TSLA (-$3.34bn -18.00%), NFLX (-$751mm -31.45%), COIN (-$710mm -36.45%), AMZN (-$469mm -4.86%) and ETSY (-$452mm -31.97%).

There were more profitable shorts than unprofitable shorts in the first quarter with 55% of all short positions adding positive numbers to a trader’s bottom lines, 35% with negative numbers and 10% were flat for the quarter.

Every sector was net profitable on the short side with the most profitable sectors being Communication Services (+14.37%), Real Estate (+11.88%) and Consumer Staples (+6.20%) while the least profitable shorted sectors were Consumer Discretionary (+0.44%), Health Care (+1.28%) and Energy (+2.03%). After being the top dog for two consecutive quarters the Consumer Discretionary gave up its top spot as the most profitable sector league table and tailed the rest of the field.

Short Selling Profitability by Sector