A look at Robinhood short selling with its incredible examples

Robinhood, a popular online brokerage used by retail traders to accumulate heavily shorted stocks like GameStop Corp, has recently made an aggressive push into lending its customers’ shares to short sellers to expand its business.

According to a regulatory filing on Monday, it was allowed to lend out $4.6 billion worth of securities under margin agreements, about five times more than the previous year. As of Dec. 31, it had loans of $1.9 billion, nearly three times the $674 million a year earlier.

Since Robinhood’s short-selling helped pioneer trading fees elimination for retail brokers during the pandemic, and as retail investors have risen in the work-from-home environment as the number of retail investors has soared, the jump highlights Robinhood’s rapid growth over the past year.

A public offering for Robinhood, the Menlo Park, a California-based company, is expected to occur this year. It had 140% short interest in January. By lending their shares to hedge funds and other investors, brokers allow their customers to earn income by selling them back on the market for a smaller price when it’s time to return them on an online trading platform. Brokerage firms pocket the difference when it’s time to replace the shares. Enormous premiums from the lender are for claims that are highly sought after by short sellers, such as GameStop.

One senior financial executive with experience in hedge funds noted that many of the stocks Robinhood users invest in are among the most sought-after by people who want to bet against them.

Trading software Robinhood does not disclose how much its securities lending generates income and revenue. Robinhood did not immediately answer a request for comment on what stocks it has loaned out. In January, a group of retail investors coordinated using trading forums on social media, buying up shares of GameStop and other heavily shorted stocks, including AMC Entertainment, forcing short sellers to cut their losses and driving up the prices of shares. When retail trades peaked in early January, GameStop and several other so-called meme companies were barred from trading by Robinhood and several other brokers due to increased collateral requirements. The move angered many of the broker’s customers.

Congress held hearings on the regulations, and regulators looked into short selling more closely.

The chief executive officer of Robinhood responded by requesting that stock settlement time decrease to streamline the clearing process.

He added that short-selling too many shares of a company would destabilize the financial markets, as with GameStop.

Since October 2018, Robinhood has been positioning itself for growth in securities lending by launching its clearing on online broker comparison. This tool acts as a middleman with its clearinghouse, which settles trades and allows it to hold assets for its customers. Customers buy securities on margin from the broker, who then lends them out.

Short-sellers are shorting Stocks of Robinhood.

According to Finviz data, ten stocks mentioned below were the most short-sold (as a percentage of float) on the entire Robinhood platform in March.

• 38.1% of float held short by Rocket Companies
• NASDAQ:BLNK: Blink Charging (36.3%)
• The GameStop Corporation (NYSE: GME): 30.4%
• 28.3% of Senseonics Holdings
• The Nano Dimension is 28%
• The FuboTV share is 27.9%
• 27.3% for TherapeuticsMD
• (NASDAQ: INO) Inovio Pharmaceuticals: 25.8%
• Sundial Growers (NASDAQ: SNDL): 24.4%
• Castor Maritime: 23.7%

In this list, the one thing that stands out is that short-sellers and millennial investors are avid players in penny stock tug-of-war. Among other penny stocks within the past 12 months, Nano Dimension, Inovio, and Senseonics are hovering around the $1-per-share mark, while TherapeuticMD, Sundial Growers, and Castor Maritime have been below that level.

The reason penny stocks are cheap is that they are priced low. Their business models are often unproven, or they lose money. Even though penny stocks are not always a bad investment, caution is usually a good idea while being on a day trading platform.

Over the past five months, Sundial Growers, which everyone hates, has issued massive amounts of new shares to its existing investors. The company issued over 1.1 billion new shares, which raised over $600 million in cash. In light of Sundial’s approximately 1.66 billion outstanding shares (including warrants recently exercised for 98.3 million shares), significant profits per share are unlikely.

Shorting penny stocks, however, is extremely dangerous. Sundial is an example of how irrationality can persist for weeks or months, even with a clear bearish case. The short squeeze could increase the euphoria felt by momentum investors that lock in on penny stocks.

In addition to this, one thing worth mentioning about Robinhood’s ten most shorted stocks is that pessimists have the potential to be right in nearly all of these cases (penny stocks or not).

Blink Charging, for example, a provider of electric vehicle (EV) chargers and operators of EV stations, has lost more than half of its value in the past month but still commands a $1.25 billion market capitalization. Through nine months of 2020, Blink generated only $3.8 million in sales despite being positioned as the future of automotive technology. A growing field of ancillary EV players makes it difficult for Blink to differentiate its products and services from the competition. 

Additionally, Inovio Pharmaceuticals, a drug developer, has been working on clinical trials for four decades without bringing anything to market. FDA-approved therapy is now available for sale. By announcing its involvement in COVID-19 vaccine development last year, Inovio generated quite a bit of buzz. The company has, however, placed a partial hold on phase 2/3 of the study. Inovio has been unable to begin late-stage trials, despite starting mid-stage studies.

GameStop is another company that prompted the Reddit frenzy in January. GameStop’s total sales declined by 3.1% over the past year despite 309% e-commerce growth throughout the holiday season. They also lost 11% of their store base. In recent years, GameStop has shut down several of its physical stores because it tries to get back on track to profitability by switching to a digital focus.

Short interest often stems from an excellent reason.