Short Selling on Nasdaq Hits Record
Investors expecting a further drop in stock prices have stepped up their bearish bets in recent weeks, with the number of shares sold “short” on the Nasdaq Stock Market hitting another record.
So-called short interest on Nasdaq rose to 3.61 billion shares as of March 15, up 5% from 3.44 billion as of Feb. 15, according to figures released Monday. Short interest represents the number of shares sold short by investors but not yet bought back. The total had declined in the 30-day periods ended Jan. 15 and Feb. 15.
In a short sale, a trader borrows stock from a brokerage and sells it in the open market. The bet is that the stock’s price will decline, allowing the trader to buy back the shares at a lower price later to repay the loan.
If the stock falls, the short seller’s profit is the difference between the sale price and the price paid to buy back the shares. If the stock rises, however, a short seller can incur huge losses.
Heavy short selling can contribute to a falling stock market. But a large short position in an individual stock also can be bullish: If the stock rises rather than falls, short sellers might rush to buy back the shares to close out their wrong-way bets--adding fuel to the stock’s rally.
Despite Nasdaq short selling being at a record, some experts are surprised that shorting hasn’t been heavier given the continuing plunge in tech stocks. The Nasdaq composite index fell 24% from Feb. 15 to March 15.
David Tice, who manages the short-oriented Prudent Bear mutual fund, says many investors are afraid to short stocks even after watching them collapse over the last year.
“There are a lot of people who are nervous about a rally,” he said. “They’re scared to death to short.”
Another possible explanation: Investors who had shorted stocks late last year took profits after the sharp drop in prices.
The number of Cisco Systems (ticker symbol: CSCO) shares sold short jumped by almost one-third from Feb. 15 to March 15. But the roughly 64 million shares now sold short are only about 40% of Cisco’s recent short-interest peak of more than 162 million in February 2000.
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‘Shorted’ Tech Giants
Here are some leading Nasdaq-listed technology stocks and how the number of shares sold “short”-a bet on a falling stock price-changed between Feb. 15 and March 15. Also shown is the percentage gain or loss in each stock year to date.
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Shorted shares Change Stock as of March 15 from price Stock (in millions) Feb. 15 YTD Check Point Software 7.59 +231% -39% Verisign 14.01 +148 -52 Winstar Comm. 23.61 +82 -76 BEA Systems 18.46 +76 -52 Ariba 32.58 +63 -79 Veritas Software 22.84 +37 -43 Cisco Systems 64.19 +33 -53 Microsoft 44.96 +29 +29 WorldCom 72.18 +27 +28 Intel 40.34 +16 -6
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Source: Bloomberg News
