Snap Borrow

Snap Borrow
TeroVesalainen / Pixabay

Sometimes shorting a stock can be difficult and expensive.  In order to sell a stock short, you must first borrow the shares.  Because there is not a centralized lending market for stocks when there is a big demand to short a stock the lending market can become congested.  When it does so, the rebate rate can skyrocket.  For those of you who aren’t familiar with the rebate rate it works like this.  Say I borrow Snap to short it and then sell the stock for say $100,000 dollars.

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The rebate rate is the rate the I receive on the $100,000.  In many cases, it is zero.  But in some cases, when there is a big demand to short the stock, it can turn negative.  In the case of Snap, the rush to short it in recent days has been so great that the rebate rate has exploded to a NEGATIVE 60% per year!  (See the link below.)  That means I would have to pay 60% interest on the $100,000 while I was short Snap.  Clearly, I would not do so unless I expected the stock to crater in the near future.  But that is exactly what many investors have been doing in recent days.  The next few weeks leading up to the expiration of the lock-up on Snap share at the end of July will be interesting days indeed for Snap investors.

Article on the Snap rebate rate

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Bradford Cornell is an emeritus Professor of Financial Economics at the Anderson School of Management at UCLA. Prof. Cornell has taught courses on Applied Corporate Finance, Investment Banking, and Corporate Valuation. He is currently developing a new course on Climate Change, Energy and Finance. Professor Cornell has published more than 125 articles and four books on a wide variety of topics in applied finance. Professor Cornell is also a managing director at BRG where he heads the practice on Climate Change, Energy and Finance. In addition, he is a senior advisor to the Cornell Capital Group and to Rayliant Global Advisors. In both capacities, he provides advice on fundamental investment valuation.
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