Tech Transformers

Short sellers paid more to short Facebook shares on its debut than Snap


Traders paid more to "short" Facebook shares on its public debut than they did when Snapchat parent Snap went public, according to new data, with analysts suggesting the initial bearishness towards the newly-listed social media firm is beginning to calm.

Shorting a stock involves an investor borrowing a security and selling it. If the share price then falls, the investor will buy it back and make a profit. Lenders of the stock also make money by charging a fee on the total value of shares being borrowed. A higher fee indicates willingness from investors to short a stock, and therefore more bearish sentiment.

When Snap shares were first available to be shorted on March 7, short sellers were being charged a fee of between 15 to 25 percent, according to data firm IHS Markit, who said the average U.S. security costs about 0.5 percent to borrow.

That number is below the 45 percent charged to borrow Facebook shares when they were available to the short selling market on May 22, 2012, and the 19 percent fee seen for Twitter on November 13, 2013, IHS Markit data showed. But fees on a public debut can be extremely high. For example, Groupon traders were charging short sellers a 105 percent fee when the shares were first available to short on November 9, 2011. There has been no fundamental change in the fees charged over the last few years, according to IHS Markit research analyst Simon Colvin.

Snapchat co-founders Bobby Murphy (l) and Evan Spiegel (c) ring the opening bell on March 2, 2017, as NYSE President Thomas Farley looks on.
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The fee is an "annualized overnight fee" charged on the notional value of the shares borrowed. For example, if you borrow a million dollars of Snap shares over the year, you will be charged $150,000 at a 15 percent fee.

On the first day short selling was possible for Snap shares, there were $155 million shares on loan. As of the close of trade in the U.S. on Wednesday, there were $260 million shares on loan, a rise of 67 percent.

But after the first day, fees for Snap's stock quickly fell to just 5 percent, as some bearish sentiment began to fade. This was reflected in the fact that Snap shares closed over 6 percent higher on Wednesday.

"That fee has been coming down because we have seen more supply come on board and that increase in supply has not necessarily been reflected in increased demand to borrow," Colvin told CNBC by phone on Thursday.

"It's a first day rush."

Disclosure: NBCUniversal is an investor in Snap.