By Edward Krudy and Alistair Barr
NEW YORK, May 23 (Reuters) - Short sellers desperate to bet against Facebook shortly after its debut on public markets are now getting their chance.
Shares of the much-anticipated IPO have fallen sharply since they opened at $42.05 on Friday amid an initial flurry of trading problems at the Nasdaq and after news that top underwriters cut their revenue estimates just days before the offering.
Yet, short sellers are still eager to bet against the stock given its lofty valuation.
Facebook shares were up 3.1 percent to $31.97 on Wednesday, still down 16 percent from their $38 IPO price. Interest from short-sellers was high, but as more shares became available to borrow, the cost was decreasing.
“Right now it’s unlimited demand - everybody is looking for it because everybody initially wants to put the short on,” said a lending agent at a securities lending agency, which finds shares for brokers to borrow to lend to hedge funds and other clients.
Short sellers borrow shares and sell them in the open market. They aim to buy the shares back at a lower price, return them to the borrower and pocket the difference.
“I believe this will change pretty dramatically over the next couple of days,” the agent said.
The cost to borrow the stock varied from 5 percent to 50 percent on an annualized basis, according to several securities lending sources and hedge fund managers trying to borrow the stock.
That is far in excess of so-called “general collateral” stocks, which lend at a few basis points, but below other recent Internet IPOs, such as those of Groupon or LinkedIn , which carried such expensive annual borrowing costs that the only way to profitably bet against them was to do so for at most a few days.
Automated Equity Finance Markets, a securities lending agency in New York, said the cost to borrow Facebook stock on Wednesday was below a 10 percent annualized rate, for a theoretical cost of less than $3 to short a $30 stock for a year.
One prime broker intending to borrow stock on behalf of hedge fund clients on Wednesday paid an annualized rate in the mid-20 percent range, the lending agent said.
“This is a very interesting situation,” said the lending agent, who asked not to be named as his company does not talk about individual companies. “Every hedge fund or person making a decision on the short has their own idea on this right now. It’s going to settle into a market, but it hasn’t settled in yet.”
Short sellers of LinkedIn had to borrow at a cost of 11 percent to 99 percent in its first three months of trading, although not many shares traded at the top end of the range, according to Automated Equity Finance Markets, a securities lending platform.
Borrowers of Groupon faced a range of 20 percent to 85 percent while short sellers of Zynga paid 2 percent to 44 percent in the first three months, according to Automated Equity Finance Markets.
Data Explorers, a firm that tracks short-selling data, ranks Facebook’s stock a 10 in terms of its cost to borrow on a scale of 1 to 10 where 10 is the most expensive. No S&P 500 stocks have a rating of 10, Data Explorers said.
Wednesday marks the first day that Facebook’s securities are officially on loan due to the three-day settlement rule for U.S. securities. However, some managers began shorting the stock shortly after trading started on Friday.
“We got a small allocation in the IPO and sold it immediately and then shorted on Friday and Monday,” said one hedge fund manager, who said he went short without knowing the cost of borrowing.
When contacted by Reuters on Wednesday morning, the manager said he was told by his broker that he was charged a negative rebate of 55 percent. On Friday and Monday, Facebook shares were hard to borrow because there was a limited supply of the stock to lend, he said.
Now, the supply of Facebook shares to borrow has increased a lot, reducing the cost.
“There’s a huge amount of supply now, especially lots of retail supply,” the hedge fund manager added, noting that he was planning to hold his short position.
“There’s a lot of bad news and finger-pointing around this and the markets are still weak,” he said.
Approximately 18 million shares of Facebook’s stock were on loan for short selling as of May 22, according to Data Explorers. Facebook shares on loan for short sellers represent about 4 percent of the free float, though that figure will change as more data becomes available in coming days.
Facebook’s stock has fallen as low as $30.94, or 19 percent below its IPO price of $38, and more than 30 percent from a peak of $45 reached shortly after it started trading Friday.
The drop on Tuesday came after Reuters reported that underwriters had cut their revenue estimates for the stock shortly before the IPO, a highly unusual move.