SPY short issue vs UCO

March 22, 2022, 12:50 pm ET, BY Thomas H. Kee Jr- Editor, Stock Traders Daily| Editor: Thomas H. Kee Jr. (Follow on LinkedIn)

Last week I reported an issue with the unavailability of SPY shares to short.

I found this very odd, because SPY is the most liquid equity instrument in the world, and I have NEVER seen SPY shares unavailable for shorting in its existence. 

Additionally, I know there were shares available to short in lesser amounts, some of you said that you were getting filled on 100 shares, 200 shares, etc., but the order I was trying to place was 20,000 shares, and that was what was being rejected.

• They were filling smaller orders, but not larger ones.
• This is EXTREMELY odd.

What’s more, today I got a notice that said shares are available to short again.

Here is what I think happened…

I believe that institutions that hold massive amounts of SPY gave notice that they were refusing to lend the shares for shorting purposes.  That stopped large blocks from being processed.

Why would they do this?

Because they own a ton, they have a vested interest, and they wanted to do everything they could to fuel the surge.  If they can prevent short selling in the most liquid instrument in the world, it would effectually stimy pressures that might have paused the rally.

Obviously this also stops any associated interest payments that those institutions may have received from their SPY holdings (they get paid part of the margin fee if they lend shares), but today, it seems, they are lending them again.

This was a form of manipulation, but a legal one too.

Normally, if an instrument is not available to short it is because of massive short interest piling in all of a sudden, like what happened in UCO when it fell from $200 to $130, but that is not what happened with SPY, and that is what makes the action unusual.  Shorts were not piling into SPY as it surged, they were getting out.

Keep this in mind going forward.

Institutions are very willing to manipulate the market when it serves their purpose.

Support and Resistance Plot Chart for SPY

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