Stocks with an unusually small number of observations may have had no borrow availability during long stretches of the year (the lack of inventory on those days makes short selling considerably riskier and costlier for market participants). To prevent outliers from improperly affecting the rankings, we imposed a minimum - yet arbitrary - number of 100 observations per year to filter out inactive securities, or those that cannot satisfy a locate requirement. However, a small subset of those missing observations could also be due to randomly occurring data quality issues.
Only stocks traded on the national market system for most of the year are considered (though stocks could have been delisted or uplisted during the year). And only common shares of individual companies are included (i.e. no ETFs, no closed-end funds, no bonds, no preferred issues, etc...). Finally, our model is not sophisticated enough to account for ticker/symbol changes during the year.
Short Selling Mechanics & Definitions
Rebates fees represent the out-of-pocket costs in holding a stock short. It works like an interest rate on a loan paid daily. Exceptionally, the rebate fees on very easy-to-borrow stocks can sometimes be negative (though usually less than < 1% per annum, because by definition, it is always less than the going market interest rate). In those rare circumstances when the rebate is negative, it becomes a rebate rate (and acts like any other investment income, earned on the money temporarily received from opening the short sale).
On the flipside, when the rebate fee is close to 100% per year (as with the examples shown above), it means holding the stock for a year will effectively negate your short investment, even if the price hits zero and your short thesis is completely vindicated. In practicality, this is a major impediment to holding short positions. Academics usually overlook this important phenomenon, either because they value-weight (by market cap) their findings, or because they treat these high rebate fees as outliers. But this cost is real and in the world of small caps on the verge of bankruptcy, yearly fees above 100% are not unusual (or an isolated occurrence).
Additionally, most brokers will charge rebate fees on a minimum of $2.50 per share (if the stock trades for less than that). High rebate fees prevent arbitrage and contribute to inflated stock prices that take longer to incorporate bad news about the company. Such barriers to short selling degrade market efficiency. Also, the rebate fees fluctuate day-to-day and can shoot up without warning, which causes further hardship for short sellers (i.e. high rebate fees, or the risk thereof, are a binding short selling constraints).
The concept of short squeeze is related, yet different, from the cost of borrowing shares. Squeezes are characterized by a temporary lack of inventory, regardless of the cost involved. A high rebate fee that is constant will likely not contribute to a short squeeze per se, unless there are unexpected shocks to the stock loan market (e.g. callback or recall risk). On the other hand, high rebate fees are often a function of relatively few institutional holders, a bearish signal.
Stocks that see a lot of naked short selling are more likely to be included on the threshold list. However, there may be valid reasons for naked short selling other than stock price manipulation. And a high rebate fee does not in itself contribute to naked short selling (rather, it is usually a function of demand, not supply).
The SEC mandates several mechanisms to prevent bear raids on stocks. Short sale halts and short circuit breakers are examples, but the uptick rule is another.
Source: Author's database compiled from publicly available data.
