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Short-selling activity on the Toronto Stock Exchange in March offered more evidence that short sellers are in retreat as 2024 progresses amidst expectations for lower inflation and interest rates.

One clear sign is the tumble in the short position for the iShares S&P/TSX 60 Index ETF to 6.1 per cent of float, down considerably from 23.1 per cent in March of last year (short sales data supplied by S3 Partners).

Short sellers are also seeing shorted companies turning the tables on them more often. A recent occurrence was Nasdaq-listed Fusion Pharmaceuticals Inc., the biotechnology firm founded in 2014 at McMaster University in Hamilton, Ont.

Short interest in the company soared from 3.2 per cent of float in early January to 15.5 per cent in March, near the level where AstraZeneca PLC submitted a takeover bid for the company at US$21 per share — almost double the market price. Fusion Pharmaceuticals is developing a new cancer treatment that directs radioactive isotopes by internal means to cancerous cells.

Tilray Brands Inc. and other cannabis producers are also giving short sellers headaches. Their stocks ran up sharply during the past month following a call by U.S. Vice President Kamala Harris for cannabis to be reclassified to a less serious drug category.

Also, shares in payments processing firm Nuvei Corp. spiked upward on news it was evaluating proposals to go private. Dye & Durham Co. Ltd., a provider of software solutions for lawyers, got a boost when an activist investor revealed a campaign to boost its share value.

An interesting side note: also donning the mantle of activist investor is Muddy Waters Capital, the activist short seller that recently targeted Fairfax Financial. In a March 19 press release, the fund called on other shareholders to join its proxy fight against executives at Canadian junior miner Mayfair Gold Corp. The company issued a response the same day.

Big jumps in short positions (not related to hedging or arbitrage) could signal an intensification of bearish sentiment for a company, and thus an increased probability of underperformance in its stock price. But rapid escalations can also lead to short squeezes, whereby a stock price shoots upward when short sellers rush to buy back the shares they borrowed in order to cover their bets.

S3 Partners calculates a proprietary short-squeeze score for individual companies (a score of 100 is the maximum reading and suggests a squeeze is virtually certain). In March, Fusion Pharmaceuticals Inc. reached the 100 level as short sellers got slammed by AstraZeneca’s takeover bid. The spike in share price inflicted some sizeable losses on them, but the bid of US$21 per share limits their loses.

During March, there were several noteworthy developments related to short selling on the TSX.

One was further signs that the regulatory environment for short sellers is becoming less accommodative. The latest manifestation arrived in early March at the Toronto convention of the Prospectors and Developers Association of Canada (PDAC).

As reported by, PDAC delegates applauded a proposal by regulators to curtail “naked” shorting. It would require brokers to confirm that shares are available to borrow before a short sale is initiated in “hard-to-borrow” stocks (i.e. mainly low volume stocks, which are plentiful in the junior mining sector).

The PDAC delegates are urging further restrictions, particularly the restoration of the uptick rule (a short sale can only be made after an increase in share price). Junior miners say it would place them on the same footing as their counterparts in Australia.

A recent note issued by hedge fund Lightwater Partners to clients observed that it remains tougher for Canadian hedge funds to publish short-sell reports on Canadian stocks compared to U.S. hedge funds. The reason given was that the U.S. legal system allows more scope for freedom of speech.

In 2015, Ontario passed an anti-SLAPP law to protect free speech related to the public interest. There have been cases where the anti-SLAPP law protected individuals who spoke out against fraud, but it appears Canadian hedge funds remain wary.

Yet, Professor Alexander Dyck at the University of Toronto’s Rotman School of Management has disclosed in an interview that although his research has found commercial fraud in Canada is at levels similar (proportionately) to the United States, levels of detection are lower in Canada. Professor Dyck’s explanation for the shortfall includes the lack of a national securities commission, and constraints on whistleblowers and class-action lawsuits.

Appendix: Selected Methodological Notes

1) Some short positions may reflect, in part or whole, hedging/arbitrage positions – so they may not be entirely bearish bets. For example, the iShares S&P/ TSX 60 ETF is used by many institutional and professional investors to hedge out market risk from their portfolios. Many hedge funds also do pairs trading where they bet on the relative change in two stocks in an industry or other grouping by going long on one company and short on another.

2) Short positions in interlisted stocks were summed across exchanges in Canadian dollars.

3) When an investor purchases stock that was sold by a short seller, it creates a synthetic long position; if these long positions are not included in the float count, the percentage-of-float-short metric can be overstated. However, most of the time, the magnitude is not significant.

4) The percentage of float short for ETFs is impacted by the mechanism for creating/redeeming units, which results in almost daily changes in the number of units issued. The percentage of float short for ETFs may thus be more volatile than for stocks.

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