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What Do Borrow Fees Say About GameStop Stock?

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  • High borrow rates are also an indicator that short sellers’ demand remains high and that there are fewer GameStop shares available for lending.
  • GameStop shareholders have been exploring a way to reduce available shares and increase the borrow fees.

Figure 1: What Do Borrow Fees Say About GameStop Stock?

Getty

(Read more from the Wall Street Memes: SNDL Stock’s Reverse Split: Is It “Game Over”?)

What Is a Stock Borrow Fee?

A stock borrow fee, or a stock loan fee, is the fee charged by a broker to lend shares to short sellers to bet against the stock. The higher the fee, the harder it becomes to borrow the stock.

Traders often use borrow fee rates as a measure of a trade’s risk-return ratio. When borrow fees are high, short sellers need to have a lot of confidence that their trades will be profitable.

Borrow fee rates are determined by the market’s supply-and-demand conditions. If a stock is in hot demand from short sellers (in other words, it has high short interest), the borrow fees will be proportionately high, based on the supply of available shares.

According to S3 Partners analyst Ihor Dusaniwsky, high borrow rates can be valuable information for investors who are considering a stock trade:

 “An increase in stock borrow rates may force (squeeze) some short sellers into closing their positions — getting out to realize their remaining mark-to-market profits and exiting before other buy-to-covers drive the stock price up.”

GameStop’s Stock Borrow Fees

GameStop’s stock borrow rates currently stand at an annualized percentage of 32.5%. They spiked at 110% toward the end of May.

However, thanks to recent events such as GameStop’s stock split, fees have skyrocketed again, this time reaching nearly 130%. See below:

Figure 2: GameStop’s borrowed shares.

Stocksera

Such high fees indicate that there is a lot of demand for short selling GameStop stock. Note that in the early months of 2022, GameStop’s borrow rates stayed flat at a much more modest 5%.

Another indicator to look at in the chart above is the number of GameStop shares available to short sellers. Since June, with a few exceptions, the number of available shares has been much lower than we saw in the first half of 2022.

GameStop shares’ utilization rate recently remained at 100%, its maximum, for more than 100 days, according to Ortex data.

When a utilization rate is at its maximum, that means, at the beginning of each trading morning, all available shares have been borrowed. When this happens, short sellers need to be more resourceful to find shares.

Can Direct Registration Prevent Brokers From Lending GME Shares?

GameStop shareholders may have found a way to prevent their shares from being lent to short sellers.

Many loyal GameStop investors have taken to social media to encourage others to register their shares through the Direct Registration System (DRS).

One of the benefits of registering shares through DRS is to protect your positions in case your broker goes bankrupt. However, GameStop shareholders have been using this practice to leave fewer available shares for brokers to lend to short sellers, thus pushing borrow rates higher.

DRS registration also keeps shares out of the hands of market makers and payment per order flow (PFOF) brokers.

According to GameStop’s latest Form 10-Q, dated April 30, 12.7 million shares of GameStop’s common stock had already been registered with a major transfer agent, Computershare. After the 4-for-1 stock split, that would equal about 50.8 million shares.

(Read more from the Wall Street Memes: Is AMC Stock a Buy Ahead of Earnings?)

(Disclaimers: this is not investment advice. The author may be long one or more stocks mentioned in this report. Also, the article may contain affiliate links. These partnerships do not influence editorial content. Thanks for supporting Wall Street Memes)