Tuesday is the first day that traders can short shares of LinkedIn. That is, if you can find shares to borrow and are willing to pay the price.
In the market for borrowing stock, it’s still “old school.” Prime brokers are tight lipped. Traders still have to work the phones to locate shares and get pricing. Transparency is still a goal.
And in the case of LinkedIn , market watchers are expecting a high cost of borrowing—perhaps as much as forty, fifty or even sixty percent of the value of the shares on an annualized basis.
Securities lending is a market and the cost of borrowing is a function of supply and demand. LinkedIn has a relatively small float, IPO lockups and with the demand expected to be high, the cost of borrowing stock or “rebate” will be whatever the market allows.
Early indications according to John Tabacco, CEO of locatestock.com are that traders are willing to pay north of 40 percent on an annual basis to borrow shares. I am “getting hounded by hedge funds and numerous trading houses.
There are a lot of good boys out there that do not want to be naked shorts,” he says. “Naked” shorting or, shorting stocks you don’t own and haven’t borrowed is illegal. But, so far he is not having an easy time locating the shares.
Eric Newman, TFS Capital also expects rebate rates at “north of 30-percent per year” and “up to 45-percent by next week” to borrow shares of LinkedIn. This is not a fully transparent market he says, you may get five different rates from five different brokers.
Newman points out that LinkedIn is not the only expensive stock to short. According to TFS data, over the past six months Sears Holding has been trading at an annualized cost of between fifteen to twenty percent of the price of the stock making SHLD “…the most expensive large cap stock to short overall,” he says.
But, not the most expensive rebates in history—GM and Citi had rebates of around one hundred percent in mid-2009.
Typically, he adds rates to borrow shares run at close to zero percent—prime brokers make money elsewhere on the trade including, from cash held on account following the short sale.
Traders and bloggers alike are infatuated with the LinkedIn IPO. But, whether or not investors are in for the long haul may in part, be determined tomorrow.
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