Massive Increase in Stock Short Positions Began Before Pandemic
March 11th of 2020 is when the World Health Organization (WHO) first declared the COVID-19 pandemic.
Yet months prior, short sellers would begin to take larger and larger short positions on stocks—effectively, a bet against the performance of a stock—prior to nationwide shutdowns and the large economic changes that incurred.
Reports of the coronavirus spreading throughout China began in December of 2019 and by the next month short sales were already up 38 percent by value. By the time of the WHO announcement in March of 2020, short sales would be up 82 percent by volume.
Total short positions since 2019 have increased 3 to 4 fold, in both quantity and the value of the stock being shorted, according to data compiled from the Financial Industry Regulatory Authority (FINRA). FINRA short sale data includes data reported from Trade Reporting (TRF) or Alternative Display (ADF) facilities, but does not include non-public trades.
While short-selling is a bet against the performance of a stock, it’s also used as a hedge—a way to ease risk when betting on the performance of related investments. The pandemic has certainly led to substantial volatility in stock values as seen in volatility indexes like the VIX, much of that didn’t start until March of 2020.
Tech stocks have always been perennial favorites of short sellers, but the pandemic has only led to more tech short selling. While before it was Apple, Amazon, Roku, as well as semiconductor manufacturers like Advanced Micro Devices (AMD) as the most shorted, now it’s largely electric vehicle manufacturers like Tesla, Rivian, and Lucid as well as a lot of shorting of Google and Nvidia, another semiconductor manufacturer.
Moderna, famous for producing one of the major vaccines for COVID-19, would also be the target of a major short sellers, with either 250,000 to 1.7 million positions held at any one time in 2021. Prior to 2020, there were at most 62,000.
Considering all of the market tumult from the pandemic—oil prices, supply chain issues, Russia sanctions, stock market volatility—short selling might seem like a reasonable venture, but most of the stocks being heavily shorted have not crashed.
Since 2019, the Nasdaq index has only grown along with most of the stocks being so heavily shorted. Tesla, the perennial favorite of short sellers, has increased ten-fold.
An exception to this might be Facebook, whose price has crashed since the beginning of 2022. But even then it is only slightly lower than what it was at the end of 2019. A similar trend befell Nvidia whose stock is back where it was in 2021 after a short-term run. Roblox, the video game software company who came on the market with an IPO in 2021, was also heavily shorted and would see its stock price fall by half over the course of 2021.
Major Bank Positions
Some of the major banks were part of this short selling fury, with J.P. Morgan, Morgan Stanley, and Citigroup growing their portfolio of financial instruments sold, not yet purchased, substantially. Others would make their first substantial venture into shorting, like HSBC and UBS.
Goldman Sachs, on the other hand, would liquidate a vast portion of their short positions, going from almost $700 billion to less than $100 billion over the course of two years.
