Why shorting Robinhood is next to impossible right now, even if you think this rally is out of whack

Published Wed, Aug 4 20212:21 PM EDT

If you're looking to blame short covering for the Robinhood run-up, you're likely looking in the wrong place. "I don't see a short squeeze as the cause of this move up," Ihor Dusaniwsky, at S3 Partners, who follows short selling, told me. Why Robinhood is tough to short Dusaniwsky points out that the amount of shares lent out for shorting on Robinhood is still small. "You have almost 200 million shares trading in the last two days, and there is about 10 million shares that have been borrowed to short," he said. "Even if a good portion of that 10 million shares were covered, it's still just 10 million out of 200 million traded, so the effect would be minimal" on the price. One reason there is not an explosion of short selling may be that the shares are tough to borrow. (In order short a stock, an investors must first borrow the shares and sell them in the hopes of buying them back at a lower price and returning them, profiting from the difference.) Stocks with high levels of retail interest (so-called "meme stocks") are not easily lendable, Dusaniwsky told me. Many of the holdings in retail accounts are held in non-margin accounts. A broker can only take stock as collateral that are in margin accounts, Dusaniwsky explained. If they want to take stock from a non-margin account, they have to call the account holder and ask to borrow their shares and pay them a fee. Many retail holders are resistant to that offer: "Most retail brokers don't want to help the shorts," Dusaniwsky told me. Another problem for short sellers: Robinhood is not in many indexes. It's not in the S & P 500, or the Nasdaq 100, for example. "Those mutual funds and ETF providers are the big lenders of stocks to short," he told me. "This stock is not going to be in accounts like those that lend actively, so the initial supply is going to be limited. If there is more demand, lenders and borrowers will go out to institutions and ask to borrow it." Apparently, the demand is indeed there. The borrowing cost for Robinhood, Dusaniwsky told me, is 40% to 90% on annual basis. Is that a lot? It's more than a lot. It's stratospheric. The average fee to borrow stock is 0.56%, Dusaniwsky told me. "That tells me there is very little supply and a lot of demand," he said. There's not many stocks that are anywhere close to what it costs to borrow Robinhood right now. Dusaniwsky cited Hertz, at 73% borrowing costs, as one of the few that are above 50%. Still, 40% to 90% borrowing cost is a very wide spread. Why so wide? "Every broker charges as much as they can get away with," he told me. "I think that will narrow" as the stock begins to season, but it could take some time. That high borrowing cost is a major impediment for short sellers, Dusaniwsky told me. "If you're paying a minimum 40% borrowing costs, you have to assume you're going to make more than that over the time period you are holding it. Even if you hold for 3 months, it's still 10% borrowing costs, " he said. "So if you think you're going to make 20% in 3 months, you are still only making 10% net of the borrowing costs," he added. " You have to ask, is the risk worth it? Can I make the same return with another trade?" Momentum traders piling in So why is Robinhood shooting up? A new investment from ARK Invest's Cathie Wood may have been the spur, but "The most likely explanation is long buying," he said. "It's retail and momentum investors pushing the price up. I don't see value investors getting in, I see retail and momentum traders riding shoulder to shoulder." The one feeds off the other, particularly the momentum traders: "They're going in and out, intraday, buying and selling," he said.

Vlad Tenev, co-founder and CEO of Robinhood, rings the opening bell at the Nasdaq on July 29, 2021.

Source: The Nasdaq

If you're looking to blame short covering for the Robinhood run-up, you're likely looking in the wrong place.