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More than a dozen academic papers over the years have found that short seller trades can help investors spot loser stocks. For this reason, the Globe and Mail presents monthly updates on short-selling activity in Canada. During the month ending May 24, the highlights were:

  • At the market level, short interest edged up on the Toronto Stock Exchange (TSX);
  • At the sector level, there was a jump in short sales of cryptocurrency ETF units;
  • At the company level, short interest provided by S3 Partners showed notable activity in Canadian Imperial Bank of Commerce, TC Energy Corp., Power Corp. of Canada, Shopify Inc., Canopy Growth Corp., Arc Resources Ltd. and BMO S&P/TSX Equal Weighted Banks ETF;
  • Recent academic research covered short squeezes, the positive impact of short sellers, and the efficacy of short-selling signals.

Higher bearish bets at the market level

The dollar value of short interest in the iShares S&P/TSX 60 ETF (XIU-T), which can be viewed as a proxy for bearish sentiment at the market level, rose to $2.1-billion in May for a 15.4-per-cent increase over the previous month. Compared to October, the value of the May short position was 4.0 per cent higher: short sellers did reduce the number of units short over this period but their dollar exposure still climbed because of strong price appreciation in XIU.

Short interest in iShares S&P/TSX 60 ETF (XIU-T)

DATE# OF UNITS SHORT$ VALUE OF SHORT INTEREST
May. 2171.3 million$2.10
Apr. 1562.6 million$1.82
Oct. 2382.4 million$2.02

Source: S3 Partners

Short interest in cryptocurrency ETFs

There are now at least 19 cryptocurrency ETFs in the Consolidated Short Position Report published by the Investment Industry Regulatory Organization of Canada (IIROC).

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More than 14 million of their units were sold short as of mid-May, an increase of 20.6 per cent versus April’s total. However, dollar exposure went down (not shown in table) because of an average 30-per-cent decline over the month in the unit prices for crypto ETFs.

One lone crypto ETF swam against the tide and rose 40 per cent over the month: the Betapro Inverse Bitcoin ETF, which bets on daily crypto prices falling.

Short interest among cryptocurrency ETFs

CRYPTOCURRENCY ETF NUMBER OF UNITS SHORTED MAY 15NUMBER OF UNITS SHORTED APRIL 15% CHANGE
3IQ Coinshares Bitcoin ETF CADBTCQ-T 173,346 26,959 543.0%
3IQ Coinshares Ether ETF UnitsETHQ-T 162,945 84,991 91.7%
Betapro Bitcoin ETFHBIT-T 4,635 956 384.8%
Betapro Inverse Bitcoin ETFBITI-T 23,477 9,249 153.8%
Bitcoin ETF CAD Unhedged EBIT-T 130,336 7,679 1597.3%
Bitcoin ETF USD Unhedged EBIT-U-T 33,395 12,936 158.2%
CI Galaxy Bitcoin ETF CAD Unhedged BTCX-B-T 3,097,156 2,865,615 8.1%
CI Galaxy Bitcoin ETF Unhedged USDBTCX-U-T 325,032 46,960 592.1%
CI Galaxy Ethereum ETF CAD UnhedgedETHX-B-T 2,543,858 2,538,009 0.2%
CI Galaxy Ethereum ETF USD Unhedged ETHX-U-T 148,210 522,644 -71.6%
Ether ETF CAD Unhedged ETHR-T 350,197 310,169 12.9%
Ether ETF USD Unhedged ETHR-U-T 9,365 25,709 -63.6%
Ninepoint Bitcoin ETF BITC-T 550,678 -
Ninepoint Bitcoin ETF USDBITC-U-T 5 12,606 -100.0%
Purpose Bitcoin ETF CAD Currency Hedged BTCC-T 85,635 196,868 -56.5%
Purpose Bitcoin ETF CAD Non-Cur Hedged BTCC-B-T 822,911 472,550 74.1%
Purpose Bitcoin ETF USD Non-Cur Hedged BTCC-U-T 5,326,032 4,401,670 21.0%
Purpose Ether ETF CAD Cur Hedged ETHH-T 418,857 114,560 265.6%
Purpose Ether ETF CAD Non-Cur HedgedETHH-B-T 163,221 167,584 -2.6%
Purpose Ether ETF USD Non-Cur HegdedETHH-U-T 134,836 207,960 -35.2%
Total 14,504,127 12,025,674 20.6%

Source: Investment Industry Regulatory Organization of Canada 

Notable changes over the past month in short interest for companies

The table, Top 10 companies with notable 1-month increases in short sales, shows the largest increases in the dollar value of short interest for companies with 4.0 per cent or more of float sold short. Canadian Imperial Bank of Commerce, TC Energy Corp. and Power Corp. of Canada are companies that stand out, with particularly large jumps in short interest on the basis of dollar values and percentages.

Note: short interest may not always be a speculation on lower prices. It can also reflect hedging or arbitrage seeking to exploit price discrepancies between stocks and convertible securities.

Top 10 companies with notable 1-month increases in short sales (as of May 24)

COMPANYTICKER1-MONTH RISE IN SHORT SALES ($-MIL)% OF FLOAT SHORT1-MONTH % RISE IN SHORT SALES
CIBCCM-T$477.25.5%16.9%
TC Energy Corp.TRP-T$437.64.6%19.3%
iShares S&P/TSX 60 ETFXIU-T$327.017.0%18.4%
Power Corp.POW-T$307.46.0%32.1%
Barrick Gold Corp.ABX-T$262.24.4%12.8%
Imperial Oil Ltd.IMO-T$188.16.9%44.4%
BMO S&P/TSX Eq. Wt. Banks ETFZEB-T$173.823.6%67.8%
iShares Core S&P/TSX Composite ETFXIC-T$152.910.7%19.9%
Kirkland Lake Gold Ltd.KL-T$151.95.1%28.5%
Great West Lifeco Inc.GWO-T$136.611.8%13.0%

Source: S3 Partners

Companies with less than 4 per cent of float are screened out

The table, Top 10 companies with notable 1-month decreases in short sales, shows the largest decreases in the dollar value of short interest at the company level. Some of the more substantial dollar and percentage declines were recorded by Shopify Inc., Canopy Growth Corp., and Arc Resources Ltd..

Top 10 companies with notable 1-month decreases in short sales (as of May 24)

COMPANYTICKER1-MONTH DROP IN SHORT SALES ($-MIL)% OF FLOAT SHORT1-MONTH % DROP IN SHORT SALES
CP RailwayCP-T-$135.92.5%-9.2%
BMO S&P 500 ETFZSP-T-$131.40.7%-29.3%
Manulife Financial Corp.MFC-T-$106.62.8%-4.3%
Fortis Inc.FTS-T-$103.91.2%-12.1%
Shopify Inc.SHOP-T-$92.41.4%-51.6%
Canopy Growth Corp.WEED-T-$85.911.5%-33.3%
Boralex Inc.BLX-T-$83.72.5%-16.3%
Arc Resources Ltd.ARX-T-$80.72.7%-81.8%
Lundin Mining Corp.LUN-T-$70.74.5%-20.1%
Voyager Digital Ltd.VYGR-T-$65.10.7%-23.7%

Source: S3 Partners

Highlights from recent academic research

Finance professors and university researchers produce every month a steady stream of peer-reviewed papers on investing topics such as short selling on stock markets. They can be technical in nature but still provide useful takeaways for the investment community.

Some themes in recently published articles and working papers (to be found on ssrn.com) are: the positive impact of short sellers and the utility of signals from short-selling activity.

Does short selling reduce analysts’ optimism bias in earnings forecasts?, published by Deshuai Houa and co-authors, finds that the accuracy of analysts’ earnings forecasts improve in line with short interest in a stock (due to more information being available on red flags).

Short-Selling Threats and Corporate Tax Policy: Evidence from Regulation SHO, written by Johan Maharjan and associates, “suggests that short-selling threats … reduce managers’ incentive to use aggressive tax policies as an earnings manipulation tool…”

Do Managers Learn from Short Sellers? Evidence from Corporate Acquisitions, by author John J. McConnell and others, finds that when short sellers put downward pressures on a company’s stock after managers bid for another company, the lower price signal often prompts managers to withdraw their bid for what would likely have been a value-destroying acquisition.

Short Selling Prior to Going Concern Disclosures, posted by authors Jian Huang and others, concludes that “short selling increases significantly” ahead of “going concern” warnings.

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Short Selling and Firm Investment Efficiency, produced by Chang Yu, argues short selling ahead of financial statement announcements can signal a company’s “future investment inefficiency.”

Gamestonk: What Happened and What to Do about It, written by James Angel, declares short squeezes like the one that sent GameStop stock from $19 to $484in January are systemic threats that raise questions about the duties of financial service professionals, the role of “payment for order flow,” the T+2 settlement cycle and disclosure of short positions.

Short Selling Activity and Future Returns: Evidence from FinTech Data, issued by author Antonio Gargano, uses U.S. data obtained from S3 Partners to find that the percentage of shares sold short “is a bearish indicator, consistent with theoretical predictions and with the intuition that short sellers are informed traders.”

Ownership Structure and Short Covering: Evidence from Earnings Announcements, written by Sanjeev Bhojraj, posits that favourable earnings news can result in an overshoot in stock price when short sellers cannot easily locate enough shares to cover their positions (particularly when large blocks are tied up by long-term investors such as index funds and insiders).

The Loan Fee Anomaly: A Short Seller’s Best Ideas, authored by Joseph Engelberg and others, finds that stock loan fees are the “best predictor of cross-sectional returns [from short sales].”

Larry MacDonald can be reached at mccolumn@yahoo.com

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