August 12, 2014 / 4:31 PM / 3 years ago

El Pollo Loco shares fall, cost for short bets up sharply

NEW YORK (Reuters) - Shares of El Pollo Loco were down sharply on Tuesday after an initial plunge of 19 percent as more investors lined up to place short bets on the restaurant chain.

The stock was last down 7.3 percent at $33.18. However, it has still more than doubled from its initial offer price of $15 in late July.

The cost of borrowing the stock has shot up to a 100 percent annualized rate owing to limited supply in terms of shares still available on loan, said Karl Loomes, market analyst at SunGard’s Astec Analytics.

“Given how high the cost currently is however, we would probably expect additional shares made available on loan to be snapped up if everything remains the same (if short sellers still intend on short selling),” Loomes said in an email.

According to Markit data, 97 percent of the shares available for short bets are being used for such purposes - amounting to 4 percent of the shares outstanding. More supply will be available to short as the lockup period - a length of time where insiders are prohibited from selling - ends.

Overall, there are 35.86 million shares outstanding, but the free float - shares available to trade - is currently just 5.99 million shares.

Less than five seconds after the opening, the stock hit a low of $28.99. Light liquidity at the opening bell likely drove the shares down so quickly, said Eric Hunsader, chief executive at Nanex in Winnetka, Illinois, a market technology firm.

“It was probably somebody who wanted to sell a bit and didn’t know the open has zero liquidity,” he said, adding that about 1,000 trades took the stock to its low, with about half of a million shares traded.

“That was a big flush right down. It was really sloppy, the prices were everywhere on that. That’s usually because it wasn’t just a market order but something that went into an algorithm that tried to sell it as fast as it could, and there was no liquidity.”

Reporting by Caroline Valetkevitch; Editing by Tom Brown

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