The Lending Tree of Short Positions
The first step in understanding high short interest is to understand the process of the lending tree in U.S. equities and ETFs. Given that an investor cannot short-sell a security without first locating and borrowing it, a basic formula must hold true.
Number of outstanding shares + Number of open interest shares held short = Number of open interest shares held long.
For example, imagine that a particular ETF has only 100 shares in existence, all owned by investor A, who has a lending agreement in place with his or her custodian. Investor B, who is interested in shorting these shares, borrows them from investor A and provides cash collateral from the sale of these securities. Investor B sells these shares (taking ...
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