‘Shorted’ Shares Rise to Record on NYSE

Bearish traders boosted their bets on falling share prices between mid-October and mid-November, driving the total number of “shorted” shares on the New York Stock Exchange to a record, the exchange said Monday.

That could help explain the market’s strong rally in recent weeks: As shares rise, some traders who had bet against higher prices may scramble to close out their positions, which can add to an upward pressure on prices.

The NYSE said the number of shorted shares rose to nearly 8.81 billion as of Nov. 15, up 1.8% from mid-October and up 14% from mid-January.

In a short sale, a trader borrows stock, usually from a brokerage’s inventory, and sells it in the market. The bet is that the price will decline, in which case the trader would eventually pay off the loaned shares with stock bought at a lower price.

If the bet is correct, the trader’s profit is the difference between the sale price and the repurchase price.

If share prices rise instead of falling, however, a short seller faces potentially unlimited losses until he buys back the stock to terminate the trade.

Major stock indexes fell sharply in October as interest rates rose on inflation concerns. The blue-chip Standard & Poor’s 500 index dropped 1.8% in the month, its largest monthly loss since April. That apparently emboldened some bearish traders to boost their short sales.

This month, however, the market has been on a hot streak. The S&P; 500 hit a 4 1/2 -year high on Monday and is up 4% since Oct. 31.

One example of an NYSE-listed stock that has burned short sellers recently: GameStop Corp., the largest independent video-game retailer.

More than 10.5 million GameStop shares have been sold short as of Oct. 15, double the level in June. Some traders evidently viewed the stock as overvalued, trading at about 21 times estimated earnings per share for the fiscal year ending in January 2007.

Yet the stock has jumped 23% since mid-October, to a record $37.80 on Monday.

Interest in GameStop has been stoked in part by anticipation of Microsoft Corp.’s release of the Xbox 360 game player, expected today.

“The Xbox 360 will be able to drive quite a bit of [video game] sales going forward,” said Steffen Torres, a fund manager at Delaware-based Kalmar Investments, which owns 1.2 million GameStop shares.

The number of shorted GameStop shares had fallen to 10.1 million as of Nov. 15, the NYSE said Monday.

For the market as a whole, the number of shorted shares rocketed during the bear-market period of 2000 through 2002. Short selling waned after that, as a new bull market began, but has picked up again this year.

Bloomberg News was used in compiling this report.