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Marginal decline in share borrowing as price declined over last
week
Borrow cost declining as shorts start to cover
Echoes of trading around 2018 KodakCoin announcement
On January 8th, 2018 Eastman Kodak Co shares closed at $3.10,
their value having declined by 80% over the preceding 12 months.
Over the next two days, the shares more than tripled in value,
closing January 10th at $10.7; insufficient to offset the losses
over the prior year, but a boon for long investors, nonetheless.
The cause of the about-face was the announcement of KodakCoin, a
partnership the firm was forming to develop a blockchain
cryptocurrency solution for payments to photograph rights
holders.
A tripling will cause problems for short sellers. The pain of
the unrealized loss is compounded by the lossmaking position having
grown in nominal terms and as a percentage of the (now smaller)
portfolio. For the prospective short seller, however, a tripling
may be a most welcome entry point, as was the case in for KODK
shorts in January 2018. The short interest reported by NYSE for Dec
29th, 2017, the most recently reported as of Jan 10th, stood at
3.2m shares. The Jan 12th short interest would later be reported as
12.2m shares, a 276% increase.
On January 10th the number of borrowed shares reported to IHS
Markit more than doubled to 5.2m shares, while the fee for new
borrows increased from < 50bps to more than 5,000bps. The
increase in borrow fee was published intraday on January 10th and
the net increase in shares on loan reported the next day on January
11th. The January 12th NYSE short interest number was not published
until January 25th, by which time the shares price, shares on loan
and borrow fee were all in decline from the January 22nd peak. By
August of 2018, the KODK share price was back below where it was
prior to the KodakCoin announcement.
The same-day spike in borrowing on the day of the KodakCoin
announcement highlights a key subtlety in how the data is reported.
The short interest data published by the exchanges is purely tied
to settlement date, so the January 12th short interest number
pertained to trading on January 10th. The securities finance data
will function similarly, in that changes in borrowing will usually
reflect changes in the settlement needs for that night, i.e. Trade
date +2; however, Kodak provides an important caveat. While
broker-dealers generally borrow shares for today's settlement
needs, they are also managing an internal long supply of shares
which they may lend out to their own clients or other brokers. If a
broker had rehypothecated KODK shares prior to the KodakCoin
announcement the combination of soaring volume and volatility,
increased locate requests and surging borrow cost may have
compelled the broker to borrow in shares today to cover the
existing short position, suspecting that the long position may be
sold and marginal borrow may be even harder to come by tomorrow so
getting ahead of today's locate requests may be worth doing
anyway.
Shifting forward by just over 2 years, amid the 2020 COVID
crash, the KODK share price closed at $1.55 on March 23rd, the
lowest point since the firm went public via an IPO in 2013 (as a
result of bankruptcy reorganization). The KODK share price
subsequently recovered along with the broader market, increasing by
35% from the low close in March to the close on Friday, July 24th.
The following Monday, July 27th, the share price increased by 25%
with no obvious catalyst. On Tuesday, July 28th, Kodak announced
via a press release that they would be receiving a loan from the US
government to develop capabilities as a provider of discount
generic drug materials. In reaction to the news the share price
increased by just over 200% to close at $7.9 (the highest closing
price since January 31st, 2018).
Like the January 2018 episode, the rapid ascent in share price
was painful to existing shorts; the 1.7m in short positions
(reported by NYSE as-of July 15th), increased in value by an
estimated $3.5m on July 24th to $56m at the peak. Also echoing
2018, short sellers immediately added to outstanding short
positions, both on the 28th and over the next week as the share
peaked on the 29th and started to descend, reaching 8.9m shares on
August 3rd. The July 31st NYSE short interest was published on
August 11th at 8.6m shares. The borrow fee peaked at 16,000bps (an
annualized rate of 160%) on August 30th and subsequently declined
with the number shares on loan; new borrows were back under
2,000bps on August 13th.
Conclusion:
"You Press the Button, We Do the Rest" so said an early slogan
for
Kodak, in 1888. That phrase would work as well for brokerage
firms in 2020, given the surge equity trading activity. The
outperformance of hard to borrow US equities starting in April
exceeds even the rally from the depths of the GFC in early 2009,
with filing for bankruptcy appearing temporarily to be a positive
catalyst. The resurgence of Eastman Kodak Co fits perfectly into
the broader narrative, however specific risks exist for investors
on the long and short side. Shares of KODK closed on August 13th at
$9.2, down 72% from the peak close on July 29th, though still up
338% from the close on July 24th. Shares on loan have decreased by
1.9m shares since August 3rd, suggesting some short sellers are
pocketing gains, while most short sellers who entered positions
after the loan-announcement await further developments to cover
their positions. In 2018, short sellers were rewarded for
maintaining positions after the initial reversal, however little
about the short selling in 2020 been grounded in precedent.
Posted 17 August 2020 by Sam Pierson, Director of Securities Finance, S&P Global Market Intelligence
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