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Can someone explain the 600% cost to short Tesla(1) stock that's discussed? I mean in terms of how that is set -- is it market driven or regulator driven? What

Can someone explain the 600% cost to short Tesla(1) stock that's discussed? I mean in terms of how that is set -- is it market driven or regulator driven? What would cause such a rate to go up without the stock evidently coming down to reduce the arbitrage discussed? 1 thanks for correction. Meant to say "Nikola" stock.

ahh 6y ago
Mostly market driven (I expect there are some regulatory concerns too but I don't know any offhand.) What this means is that there are very few holders of TSLA stock who are willing to lend it compared to the number of people who'd like to be short. I'm not sure precisely what that does imply about the people holding it; typical institutional holders do happily lend out stocks, which is why typical short financing costs are low.
- xondono 6y ago
  It implies that a higher than average percentage of holders weren’t institutional entities, since they knew the price would go down (even if they didn’t knew the magnitude of the drop), but rather small investors unaware of the warrants
- sp332 6y ago
  *NKLA
necubi 6y ago
This is actually about Nikola Motors which (despite their clear efforts to associate themselves) has nothing to do with Tesla. Nikola is hard to short right now primarily for two reasons: 1. It's a brand new company (IPO'd last month) with a large number of non-institutional share holders, who are not likely to lend out their shares. 2. It seems ridiculously overvalued (even after falling a fair bit it still has a $13B market cap despite having developed no products!), leading to _huge_ demand from shorts.
- kevin_thibedeau 6y ago
  Why is a company without a revenue stream even listed on a stock market?
  - Jtsummers 6y ago
    They merged with VectoIQ which was a publicly traded company. As a consequence of the merger the combined company was still publicly traded and changed the symbol to NKLA.
    - duskwuff 6y ago
      "Publicly traded company" is technically true but misleading. VectoIQ was a special-purpose acquisition company [1] -- it had no employees and no revenue; its sole purpose was to be used as a vehicle to take another company (like Nikola) public. [1]: https://en.wikipedia.org/wiki/Special-purpose_acquisition_company https://en.wikipedia.org/wiki/Special-purpose_acquisition_co...
      - gowld 6y ago
        Those should be called Special Corporations for Acquisitions and Mergers (SCAM). They only exist to sell to people who believe anti-fraud regulations are for losers and that real world markets should be more like EVE online.
  - mason55 6y ago
    I think before discussing that it’s worth discussing what’s the point of the stock market. That’s where people will actually disagree but one’s answer to “what’s the point of the stock market” will make clear the answer to “why is a company with no revenue listed at all?”
- intuitionist 6y ago
  Technically it didn’t IPO in any traditional sense, it went public via a reverse merger with a blank-check company, which is why these warrants are floating around out there.
OJFord 6y ago
Short selling involves borrowing stock from A, and selling it to B. If C also wants to borrow stock from A to sell to B, A sees increased demand (upward pressure on cost of borrowing stock) but B doesn't see increased supply, they can only buy from whoever ends up borrowing from A (not a downward pressure on stock price).
totalZero 6y ago
It's market driven. If you want to sell the stock short, you have to borrow it. If there's nobody who can loan it to you, you can't borrow it so you can't sell it short. Technically, you (or your broker) have to know where you'll borrow the stock before you're allowed to sell it short. In trader parlance this is called a "locate". When supply of loanable stock is low and short interest is high, the rate gets expensive. For example, this happens on stock holdings with lock-up provisions that prohibit long holders to loan or sell stock until a particular date. Among other reasons, this may happen after an employee stock option exercise, or after an IPO. There's a process called "rehypothecation" where a broker can loan shares from long Client A to short-selling Client B, charging a rate to Client B and paying a cut of it to Client A. They can also loan shares to other firms. The borrow rate is independent of the stock price. If the stock rallies, short sellers may add to their position, or they may blow out. If the stock sells off, short sellers may take profits, or they may pile in and ride all the way down. In addition to stock loan, there is a swaps market and a rev/con market. So there are various ways for the market to absorb demand for borrow. Like, if Bank ABC is long a ton of shares and the rest of the street is short, Bank ABC can sell put on a rev/con, which will imply the short rate despite the bank actually having no need to locate and borrow shares. This kind of action naturally sets the price for borrow. No regulators involved.

ahh 6y ago

Mostly market driven (I expect there are some regulatory concerns too but I don't know any offhand.) What this means is that there are very few holders of TSLA stock who are willing to lend it compared to the number of people who'd like to be short. I'm not sure precisely what that does imply about the people holding it; typical institutional holders do happily lend out stocks, which is why typical short financing costs are low.

xondono 6y ago
It implies that a higher than average percentage of holders weren’t institutional entities, since they knew the price would go down (even if they didn’t knew the magnitude of the drop), but rather small investors unaware of the warrants
sp332 6y ago
*NKLA

necubi 6y ago

This is actually about Nikola Motors which (despite their clear efforts to associate themselves) has nothing to do with Tesla. Nikola is hard to short right now primarily for two reasons: 1. It's a brand new company (IPO'd last month) with a large number of non-institutional share holders, who are not likely to lend out their shares. 2. It seems ridiculously overvalued (even after falling a fair bit it still has a $13B market cap despite having developed no products!), leading to _huge_ demand from shorts.

kevin_thibedeau 6y ago
Why is a company without a revenue stream even listed on a stock market?
- Jtsummers 6y ago
  They merged with VectoIQ which was a publicly traded company. As a consequence of the merger the combined company was still publicly traded and changed the symbol to NKLA.
  - duskwuff 6y ago
    "Publicly traded company" is technically true but misleading. VectoIQ was a special-purpose acquisition company [1] -- it had no employees and no revenue; its sole purpose was to be used as a vehicle to take another company (like Nikola) public. [1]: https://en.wikipedia.org/wiki/Special-purpose_acquisition_company https://en.wikipedia.org/wiki/Special-purpose_acquisition_co...
    - gowld 6y ago
      Those should be called Special Corporations for Acquisitions and Mergers (SCAM). They only exist to sell to people who believe anti-fraud regulations are for losers and that real world markets should be more like EVE online.
- mason55 6y ago
  I think before discussing that it’s worth discussing what’s the point of the stock market. That’s where people will actually disagree but one’s answer to “what’s the point of the stock market” will make clear the answer to “why is a company with no revenue listed at all?”
intuitionist 6y ago
Technically it didn’t IPO in any traditional sense, it went public via a reverse merger with a blank-check company, which is why these warrants are floating around out there.

OJFord 6y ago

Short selling involves borrowing stock from A, and selling it to B. If C also wants to borrow stock from A to sell to B, A sees increased demand (upward pressure on cost of borrowing stock) but B doesn't see increased supply, they can only buy from whoever ends up borrowing from A (not a downward pressure on stock price).

totalZero 6y ago

It's market driven. If you want to sell the stock short, you have to borrow it. If there's nobody who can loan it to you, you can't borrow it so you can't sell it short. Technically, you (or your broker) have to know where you'll borrow the stock before you're allowed to sell it short. In trader parlance this is called a "locate". When supply of loanable stock is low and short interest is high, the rate gets expensive. For example, this happens on stock holdings with lock-up provisions that prohibit long holders to loan or sell stock until a particular date. Among other reasons, this may happen after an employee stock option exercise, or after an IPO. There's a process called "rehypothecation" where a broker can loan shares from long Client A to short-selling Client B, charging a rate to Client B and paying a cut of it to Client A. They can also loan shares to other firms. The borrow rate is independent of the stock price. If the stock rallies, short sellers may add to their position, or they may blow out. If the stock sells off, short sellers may take profits, or they may pile in and ride all the way down. In addition to stock loan, there is a swaps market and a rev/con market. So there are various ways for the market to absorb demand for borrow. Like, if Bank ABC is long a ton of shares and the rest of the street is short, Bank ABC can sell put on a rev/con, which will imply the short rate despite the bank actually having no need to locate and borrow shares. This kind of action naturally sets the price for borrow. No regulators involved.