Key Takeaways
- To short a stock, you must first borrow it — and borrowing isn't always possible
- When everyone wants to short, borrow fees can exceed 100% annually
- Short squeezes occur when shorts can't find shares to cover
- Some stocks are on "hard to borrow" lists permanently
- Understanding the borrow market reveals hidden supply/demand dynamics
The Short That Never Was
It's January 2021. You're watching GameStop — a failing video game retailer — trade at $300. It was $20 a month ago.
Every fiber of your being screams: "This is insane. Short it."
You open your broker. Click on GameStop. Select "Short Sell."
And then you see it:
⚠️ NO SHARES AVAILABLE TO SHORT
This security cannot be sold short at this time due to insufficient borrowable inventory.
How can this be? GameStop trades millions of shares daily. The stock is right there. Why can't you short it?
"Short selling is the only trade where your conviction is worthless if you can't find the shares. You can be 100% right about the fundamentals and still unable to trade."
— Hedge Fund Short Seller
To understand why, you need to understand the secret market behind the market — the securities lending business.
Short Selling 101: The Borrow Requirement
When you buy a stock, you own it. Simple.
When you short a stock, you're selling something you don't own. To do that legally, you must first borrow the shares from someone who does own them.
The Borrowing Bottleneck
Before you can short, your broker must locate shares to borrow. These shares come from long-term holders like pension funds, ETFs, or other customers who've agreed to lend. If no one is lending — or everyone already has — you can't short.
This borrowing process happens in the securities lending market — a massive, largely invisible marketplace where trillions in assets are lent daily.
The Securities Lending Shadow Market
Securities lending is a $3+ trillion industry that most retail traders don't know exists.
Here's who's involved:
Lenders
Pension funds, mutual funds, ETFs, insurance companies with large holdings they don't plan to sell
Borrowers
Hedge funds, market makers, and traders who need shares to short or settle trades
Intermediaries
Prime brokers and lending agents who match lenders and borrowers, taking a cut
Collateral
Borrowers post 102-105% of share value as collateral to protect lenders
Lenders earn income on shares they're holding anyway. A passive investor might earn 0.5% extra per year just by lending their shares.
But when demand to borrow exceeds supply, the economics flip.
"In the securities lending market, supply is relatively fixed in the short term — it's just the shares that exist. Demand can spike infinitely. That's when things get crazy."
— Prime Broker Executive
Hard to Borrow: When Demand Exceeds Supply
Every broker maintains a list of "Hard to Borrow" (HTB) securities. These are stocks where:
Limited Float
Small number of shares available for trading (insiders own most)
High Short Interest
Many traders already shorting — shares are already borrowed
Low Institutional Ownership
Few big funds willing to lend (retail doesn't usually lend)
High Volatility
Lenders worried about recall risk in fast-moving stocks
When a stock hits the HTB list, borrow rates explode. Instead of paying 0.5% annually to borrow, you might pay:
Yes, you read that right. Some stocks have borrow costs of 300%, 500%, even 800%+ annually.
At 300% annual borrow cost, holding a short for just one month costs you 25% of the position value — before the stock even moves.
The GameStop Phenomenon: 140% Short Interest
In January 2021, GameStop's short interest reached an impossible-sounding number: 140%.
How can more than 100% of shares be shorted? It's not fraud — it's re-lending.
The Re-Lending Trap
When short sellers sell borrowed shares, the buyers can lend those same shares again. The same 100 shares can be borrowed and sold multiple times, creating short interest above 100% — and setting up a potential squeeze.
When GameStop started squeezing, shorts needed to buy 140% of the float to cover. But the float is only 100% by definition.
This creates a musical chairs situation where there literally aren't enough chairs for everyone.
The Short Squeeze Mechanics
When shorts can't find shares to cover, a short squeeze occurs:
Price Rises
Stock starts going up for any reason — fundamentals, hype, coordinated buying.
Shorts Feel Pain
Rising prices mean paper losses for short sellers. Margin calls begin.
Forced Buying
Shorts must buy to cover, adding buying pressure. Price rises more.
Feedback Loop
Higher prices → more margin calls → more buying → higher prices. Repeat.
Supply Crunch
Existing shareholders refuse to sell, or lenders recall shares. No supply at any price.
Price Goes Vertical
Stock trades at levels completely disconnected from fundamentals. GameStop: $20 → $483.
"In a true short squeeze, the price becomes whatever the last holder demands. When you MUST buy and no one MUST sell, you're at the mercy of the market."
— Melvin Capital (Lost $6.8 Billion)
The Recall Risk: Your Borrow Gets Yanked
Even if you find shares to short, there's another risk: the lender can recall them.
Why would they recall?
Voting Rights
Shareholder meetings approaching — lenders want their votes back
Better Opportunity
Lender wants to sell the stock or lend to someone paying more
Risk Management
Stock getting too volatile — lender wants to reduce exposure
Dividend Date
Approaching dividend — lender wants the actual dividend, not payment-in-lieu
When you're recalled, you typically have 3 business days to return the shares. If you can't find new shares to borrow, you must buy in the open market at whatever price is available.
Imagine getting recalled during a squeeze. The stock is up 100%. You can't find new borrows. You must buy at the worst possible time.
This is how shorts blow up.
Naked Shorting: The Forbidden Trade
What if you sold shares short without borrowing them first?
That's called "naked short selling" — and it's (mostly) illegal.
After 2008, Regulation SHO requires brokers to "locate" shares before allowing a short sale. If you sell short without a locate, you're creating "phantom shares" — selling something that doesn't exist.
Why Naked Shorting Is Dangerous
Naked shorts can create more selling pressure than actual shares exist. In theory, you could naked short infinite shares of a company, driving the price to zero. This is why regulators treat it seriously — it's potential market manipulation.
Market makers have certain exemptions — they can sell short without locates for short periods to provide liquidity. But this exemption has been criticized as a loophole that enables manipulation.
When you see "Failure to Deliver" (FTD) data spiking, it often indicates naked shorting or settlement issues. Some argue that persistent FTDs are evidence of systemic naked shorting.
The Short Interest Data Game
How do you know if a stock is hard to short before trying?
Short interest data is reported, but with significant delays:
FINRA Short Interest
Published twice monthly, with a 2-week delay. Useful for trends, useless for timing.
Broker Borrow Desks
Real-time availability from your broker, but only shows what they have access to.
Third-Party Data
Services like Ortex or S3 Partners estimate short interest more frequently.
Borrow Rate
The fee itself is a signal. High borrow rate = hard to borrow = crowded short.
Sophisticated short sellers check borrow availability before developing their thesis. What good is a perfect short idea if you can't execute it?
What This Means For Your Trading
Understanding the borrow market gives you edges others don't have:
Check Borrow Before Shorting
Always verify shares are available and check the borrow cost before opening a short position.
High Short Interest = Danger Zone
Crowded shorts can squeeze violently. Being right on fundamentals doesn't matter if you're squeezed out.
Factor Borrow Costs
A 100% borrow rate means you need the stock to fall 100%/year just to break even. Math accordingly.
Spot Squeeze Setups
High short interest + low float + rising price = potential squeeze. Trade the long side of setups.
Time Your Shorts
Consider puts instead of stock shorts — no borrow needed, defined risk, no recall risk.
Earn Lending Income
If you hold hard-to-borrow stocks long-term, consider enabling share lending to earn extra income.
The Asymmetry of Shorting
Short selling isn't just the opposite of going long. It's a fundamentally different trade with unique constraints:
Long: Buy and hold. Unlimited upside. Maximum loss is 100%.
Short: Borrow, sell, wait, pray you can cover. Maximum gain is 100%. Maximum loss is unlimited.
Add in borrow costs, recall risk, and squeeze potential, and shorting becomes a game only for those who truly understand the plumbing.
"There's a reason most legendary investors avoid shorting. The math is against you, the timing must be perfect, and the market can stay irrational longer than you can stay solvent — or liquid on your borrow."
— Legendary Value Investor
The next time you see a "can't lose" short opportunity, remember: the trade only works if you can execute it. Check the borrow. Check the short interest. Calculate the carrying cost. Understand the squeeze risk. The market is littered with the corpses of shorts who were "right" on fundamentals but wrong on timing, execution, or simply couldn't find shares. In the market plumbing of short selling, the pipes matter as much as the thesis.