Spot levels to borrow any remaining liquidity on Ziopharm Oncology (ZIOP US), the cancer treating biotech company, have skyrocketed over the past week of trading in the securities lending market with rates hitting as high as 65% fee today. It is notable that levels were trading in the single digits as recently as a week ago, a significant move in a short period of time, usually an indication of heavy recall activity.
After analyzing the latest filings by institutional holders, some large mutual funds who participate in lending programs have been unwinding their long exposure, decrementing total borrow liquidity in what is already a crowded short. As recalls by lending agents requesting shares back hit the market, prime brokers are forced to replace pre-existing borrows, driving borrow fees up dramatically to protect hedge fund shorts. Additionally, according to the S3 Crowding Indicator, a measure of the magnitude of real-time shorting activity relative to market cap and float, we have seen 2 large spikes in crowding activity over the past 3 trading days, which suggests there is still interest to maintain and even try to build bearish bets.
With borrow utilization currently over 95%, coupled with continued client interest and brokers scrambling to pay up for whatever it takes to protect shorts, fees will continue to rise for the foreseeable future. Most importantly, if lendable supply continues to decrement as institutional long holders cut additional exposure, funds will be forced to cover, potentially setting up the perfect storm for a squeeze.
For more information on the above analysis, please contact:
Matthew Unterman, Director, S3 Partners, LLC Matthew.Unterman@s3partners.com
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