Discover the exponential rise in borrowing costs as short positions grow, with critical insights on tipping points and anomalies

There is a strong relationship between the size of the short position and the annualized cost of borrowing across our universe of stocks. This relationship is not linear.

For smaller short positions, the cost of borrowing increases by a factor of 3.5 when the short position rises by 10%—for example, from 5% to 15%.

For instance, when the short position is less than 10%, the borrowing rate is 0.34%. When the position is in the teens, the rate is 1.32%; in the 20s, it is 4.77%; and in the 30s, it is 14.8%.

When the short position exceeds 40%, the borrowing rate escalates to 100%, though this conclusion is based on a limited number of data points.

Forty percent is the tipping point where the function transitions from moderate exponential growth to extreme.

There are a few outliers above this trend line, indicating that the model does not explain every data point. These anomalies occur when the borrowing rate is between 20% and 30%. Investors may want to investigate these points more closely.

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