The cost of shorting shares of Snap has fallen sharply as bets against the owner of the messaging app slowed and the share price rallied.
Snap’s stock has rebounded in recent sessions after selling off earlier in the week as several analysts’ reports expressed scepticism about the group’s valuation, which had surged above $30bn in the initial euphoria following its high-profile listing last week. At midday in New York, shares were up 1.3 per cent to $23.10 versus a low of $20.64 earlier in the week.
Traders wagering against Snap stock added about $50m of new short sales early on Thursday and the same amount on Wednesday. That compares with $300m on Tuesday when shares became available to be lent out and the cost of short selling surged, according to S3 Partners, a financial analytics group. Snap sold 200m shares for $3.4bn at the IPO, which was the largest and most high-profile tech listing in the US since Alibaba, the Chinese ecommerce giant, went public in 2014.
The cost of shorting the shares has fallen from as much as 45 per cent of the value of the short position on an annualised basis on Tuesday to a range of 5-12 per cent the next day and just 0.5 per cent to 5.5 per cent as of midday in New York on Thursday.
“It is extremely unusual for such a rapid decline,” said Ihor Dusaniwsky, head of research at S3 Partners. “It is supply driven. The amount of supply is outpacing the number of short sellers.”
The decline in cost lowers the hurdle for making a profit on a short sale.
“This [Snap] was a real big retail name — even my son bought stock,” Mr Dusaniwsky said, referring to his 27-year-old son who is a combat medic stationed in Europe. S3 Partners’ head of research added that brokers had more stock sitting in these retail accounts than they previously thought, which had driven the decline on costs.
Short sellers borrow and then sell stock that they think will fall in price, hoping to buy the shares back at the lower price later.
The mood on Wall Street for Snap has also shifted since influential hedge fund manager David Tepper told CNBC on Wednesday that he had bought shares in the IPO and liked the company even though he had sold some stock since. Mr Tepper added that he would buy more if Snap’s stock fell back towards the offering price.
Sean Stiefel, a portfolio manager at Navy Capital, which owns Snap shares, said banks were eagerly offering the shares for shorting.
“You are seeing the banks advertise short selling left and right,” he said. “It is a hot name in the sense that people want to have an opinion: good, bad and ugly.”
Activity was expected to pick up further as options trading kicks off late in the week. Options traders that write calls, or options to buy, for Snap stock will probably hedge those positions by shorting the shares, said Mr Dusaniwsky.
“There is a whole new category of players coming into the market,” he said.
