Short-Selling on Nasdaq Reaches New Record

Some investors have been ramping up their bets that Nasdaq stocks will keep going down.

“Short interest” on the Nasdaq Stock Market--the number of shares outstanding that have been borrowed and sold, in a bet that prices will drop--jumped to another record high as of mid-October.

Nasdaq said short interest surged 7.1% to 3.386 billion shares as of Oct. 15 from mid-September.

That marked the sixth month in a row, and the 17th of the last 19, that shorting of Nasdaq stocks has increased.

With the decline in many of Nasdaq’s technology stocks since spring, some short sellers have earned significant profit in the high-risk game of betting on lower prices.

In a short sale, an investor borrows shares from a brokerage and sells them in the open market. The investor hopes that the stock price will drop so the borrowed shares can later be repaid with stock bought at a lower price.

If the bet is correct, the investor profits from the difference between sale price of the stock and the repurchase price.

However, the strategy is very risky because if a shorted stock rises rather than falls, the short-seller faces potentially unlimited losses until the trade is closed out.

The increase in shorting occurred as the Nasdaq composite index fell 13.5% between Sept. 15 and Oct. 13.

Short interest often falls as the market slumps, as short-sellers close out their winning bets. But at least through Oct. 15, many short sellers appeared to believe that Nasdaq had further to slide.

Among Nasdaq stocks in which total short-selling increased sharply between mid-September and mid-October: Covad Communications (COVD), which had 16.57 million shares sold short at Oct. 15, versus 3.15 million at Sept. 15; WorldCom (WCOM), 35.99 million shares versus 29.02 million; and Yahoo (YHOO), 33.6 million versus 28.6 million.

Short interest on the NYSE also has increased recently. The total of NYSE shares sold short rose 4.2% between mid-September and mid-October, to a second straight record high.