GameStop Showed Short Interest > Float. How Could That Be?

Sometimes the simplest questions have the most difficult answers. Last week, as GameStop (GME), was at the height of its imponderable surge, a reporter asked me why Bloomberg showed that the short interest of GME was 144% of the float. Her company was not in the business of displaying erroneous data, especially when it came from an external source, yet that reading seemed illogical if not impossible. Rather than make up an explanation that could embarrass both of us, I delved into the mechanics of stock lending. I thought it would be useful to share the explanation with you.

The quick answer is that the same shares can be lent and re-lent multiple times. While the free float – which is defined as the number of a company’s outstanding shares that are available for trading and not held by insiders or the company itself – is relatively fixed, the short interest amount can vary substantially. That number is reported bi-weekly by NYSE and Nasdaq. It is unusual to see such a huge short interest relative to a company’s available shares, but it is not necessarily the sign of something incorrect or nefarious. The full answer is quite a bit more complex.

Stock lending is a crucially important and opaque aspect of the securities industry. Its opacity adds to its profitability, and its profitability is one of the reasons that brokers can offer free commissions. Brokers routinely lend out their customers’ shares, often using the proceeds either as a cheap source of funding or for outright profit. Those lent shares are used by short-sellers. Bear in mind that the vast majority of short-selling is benign, and actually a necessary lubricant to the smooth functioning of markets. Short sales are used by market makers to facilitate customer purchases and for hedging purposes. Arbitrageurs will sell stocks short against index futures or ETFs to keep prices in line. And a wide variety of traders, who legitimately believe that a company is overvalued, will short its shares after borrowing them.

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