LinkedOut–Securities Borrowing and the Inability to Correct Bad Prices

Securities borrowing costs can be a problem when trying to short clearly overvalued businesses (from a Dow Jones NewsPlus story today):

The average wholesale rate to borrow LinkedIn was 86% on Tuesday, Astec’s data show. This means that hedge funds seeking to sell the stock short may have had to pay as much as 181% on an annualized basis to borrow shares, according to the company’s estimates. LinkedIn is the fourth-most expensive stock in the U.S. to borrow at present, the same data show.

Unlike similarly priced shorts, there’s still more LinkedIn shares to go around. LinkedIn borrowers have tapped only about 22% of available shares, Astec’s data show. Very high rates usually correspond with a scarcity of stock to borrow, with utilization rates like 90% to 100%. The high cost versus a relatively ample supply was read as a sign that shareholders were capitalizing on the publicity and strong interest in bearish LinkedIn positions.

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