Robinhood Markets Inc (HOOD) reported disappointing quarterly results with monthly active users declining in the third quarter, missing on earnings but slightly better on revenues. HOOD also stated that expected quarterly revenues will come in below 2021 actuals. HOOD’s stock price traded down over -15% in aftermarket trading but rebounded slightly in early morning trading. HOOD short interest is $476 million, the fourth largest short in the Investment Banking and Brokerage sector. There are 41.02 million shares shorted, 10.93% SI % Float with a stock borrow rate of 1.57% fee.

HOOD is the 4th Largest Short in the Investment Banking & Brokerage Sector

Short selling in HOOD has been very active ever since it was listed last August, with a temporary stretch of short covering when the stock hit a plateau around the $35/share level in late October\early November. The reversal of HOOD’s short selling trend was temporary as short sellers accelerated their activity after HOOD’s data breach in mid-November 2021.

HOOD: SI Shares versus Stock Price

Short sellers continue to build their positions as HOOD’s stock price trends lower, with 10.3 million shares, worth $121 million, of new short selling over the last thirty days. This is an increase of +34% as its stock price slid -33.5%. Over the last week, ahead of its earnings release, short sellers did not sit on their laurels and shorted an additional 2.46 million shares, worth $29 million, a +6.4% jump in shares shorted as Hood’s stock price fell -15%.

Shorting HOOD shares has been a profitable trade since the stock hit its $70.39/share high a week after its listing. Shorts were up +$442 million in mark-to-market profits in 2021, up +53.3% for the year. In 2022, shorts are already up +$271 million in mark-to-market profits, up +48.1% less than a month into 2022. This includes up +$41.4 million in mark-to-market profits on today’s -8.70% price move in morning trading.

HOOD is a moderately crowded stock, scoring a 45.00/100.00 in S3’s Crowded Score metric. Hood’s stock borrow fees, SI % Float and 30 Day DTC are all above market averages. The profitability of HOOD short selling is taking the potential of a short squeeze off the table, as traders are not quick to exit a winning trade, and HOOD’s S3 Squeeze metric reflects this with a score of 5.00/100.00.

The only thing that may curb short selling in HOOD is future stock loan availability. We are already seeing stock borrow utilization topping the 90% level and stock borrow availability shrinking at many brokers. There are still several million of borrowable shares available on the street to settle short selling needs, but as those shares get taken down, we can expect stock borrow rates to get more expensive.

Also, if the sources of lendable shares start exiting their long positions, then the scarcity of borrowable shares will accelerate. If we see an increase in HOOD long sales in Mutual Funds, ETF providers and hedge funds that have their long shares rehypothecated and used as lendable inventory, then not only will financing short positions get more expensive but additional new short selling will be limited.

You can expect the HOOD short trade to get more crowded if its price weakness continues. While HOOD’s stock price might not create a short squeeze, high stock borrow financing rates and crowding on the short side might tempt some short sellers to trim their positions and realize some of their profits. But if HOOD’s stock price falls at a faster pace than stock loan rates rise, short sellers will continue to have diamond hands and wait for a significant stock price reversal before buying back their shares.