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LONDON (Reuters) - A rush by hedge funds to go short of troubled Bankia (BKIA.MC) in recent months has been stymied by a shortage of stock, limiting their gains from the Spanish bank's collapsing share price.
Shortsellers borrow shares they expect to drop in price and then sell them in the market. If the bet works, they buy them back when the price has dropped, return them to their owners, and pocket the difference.
A little over 3.7 percent of Bankia's stock was out on loan as of May 25, up from 3.3 percent in late March, according to data from securities lending research house Data Explorers.
The percentage of shares available to short-sellers to borrow depends on the number of owners willing to lend their shares out for a fee, usually institutional fund managers.
As of May 25, 89 percent of Bankia stock which can be borrowed was out on loan - a key gauge of short-selling interest - up from 61 percent in late March.
In Bankia's case, the high rate means funds face being caught out by a so-called "short squeeze" - when shortsellers try to close their positions by buying back the stock because of a rising share price end up pushing the price even higher.
Bankia shares plunged to record lows on Monday after parent company BFA was forced to ask for 19 billion euros in government aid to cover possible losses.
It has now lost 64 percent of its value since its initial public offering in July.
European regulators have banned shortselling of bank shares on occasion to try to reduce volatility and repair confidence. Investors claimed the bans often increase erratic trading rather than lessen it.
The high level of demand for shorting Bankia shares compares with demand for the average Spanish company at less than 19 percent of the shares available for lending. Rates for rivals Caixabank (CABK.MC) and Banco Popular Espanol POP.MC run to 81 percent, the Data Explorers research showed.
Editing by Dan Lalor