BANKING stocks were among the least shorted ahead of the Silicon Valley Bank (SVB) failure, based on February 2023 data published by S&P Global Market Intelligence on Thursday (Mar 23). 

This suggests that the market was mostly taken by surprise, said S&P analysts, who also noted that short interest in financial stocks sold on major US exchanges was at 1.4 per cent – the lowest of all sectors studied. 

Short interest measures the percentage of outstanding shares held by short sellers.

Traders typically sell a security short if they anticipate that prices of the stock will fall.

Short interest in financials in February was also nine basis points lower than it was at the end of 2022. 

The analysts said: “While short interest in some of the banks hardest-hit by the crisis was above average, it remained well below some of the most shorted companies, and saw declines from the previous month... For the most part, short sellers did not see the recent bank failures coming.”

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SVB Financial Group, the parent company of SVB, had short interest of 5.4 per cent at the end of February, down from 6.9 per cent in mid-January.

On Mar 9, investors and depositors pulled US$42 billion in one day from the bank, triggering the largest US bank failure since 2008. 

Short sellers also did not foresee Signature Bank’s shutdown in March.

The report showed that Signature Bank had 6.1 per cent short interest at end-February, down from 6.4 per cent in mid-January.

In the report, S&P analysts noted that the most shorted financial stock at end-February was cryptocurrency-focused Silvergate Capital, which had short interest of about 66.8 per cent, up from 63.9 per cent at end-January. The company is the parent of Silvergate Bank. 

Two other financial stocks that had relatively higher short interests were Upstart Holdings and Rocket Companies. 

As at end-February, US-listed consumer discretionary stocks had the highest average short interest of 5.7 per cent, as sellers continued to bet that persistently high inflation will lessen demand. 

This was followed by healthcare stocks which had an average short interest of 4 per cent, and communication services stocks with a 3.9 per cent short interest.