Welcome to our first edition of tackling a few of the questions we receive from our Weekend Newsletter. If you have any questions – Feel free to reply to the Newsletter email.
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How long do short sellers hold on to their shares? How much interest does the holder lending shares charge the short seller? Are there any patterns in daily price movements that can help identify short selling-related share price movements? – Hugh
The rightmost column in our short selling page shows ‘days to cover’ – This metric estimates how long it would take for all short sellers in a particular stock to close out their positions. It’s calculated by dividing the short interest by the average daily trading volume.
In terms of interest, this can vary among brokers. A CFD broker like FPMarkets has a base rate of 4.1% for Australian equities (this applies to both long and short positions), according to their website. The interest rate can also vary depending on the volatility and risk profile of the underlying asset.
It’s worth being mindful of stocks that have high short interest. They can be subject to more volatility, especially during periods such as reporting season.
Domino’s Pizza (ASX: DMP) short interest was around 6.0% heading into its FY23 results on 23 August.
FY23 earnings missed consensus expectations while sales were in-line
FY24 trading update (first seven weeks) was upbeat with network sales up 12.6% against the prior period
Domino’s shares opened 5.3% lower but experienced an immense squeeze, closing the session 11.8% higher. The market might've missed the cue about the FY24 rebound, but the intraday price action was likely exacerbated by short covering.
I frequently see stocks traded in odd increments within “course of sales data”. For example, there are trades for BHP at $44.225 or ANZ at $25.005. Can you please explain how other traders can bid in such increments? – Tom
Some of the strange denominations are associated with the way the stock has been traded, such as:
Block trades: These are large trades that are executed off-market, meaning they are not displayed in the ASX order book. The block trade appears within the course of sales data as a single line and the price may not be a whole number, as it is calculated based on the average price of all the individual shares that were traded.
Short sales: Short sales are often executed at the best available price, which may not be a whole number
Investors can technically trade these denominations on off-exchanges such as ASX Centre Point and Chi-X Hidden Liquidity. These are known as dark pool liquidity, where investors can buy and sell shares without revealing their orders to the rest of the market. But if they get filled, you’ll see them in the course of sales.
If you’re creating an order on IRESS, you can choose where you want your bid to go – By default, it’ll be the ASX but you can send it to other exchanges like Centre Point and Chi-X.
How do dual listings work (e.g. BHP and Rio Tinto are also listed in the US). How do profits and dividends get split up? Why are the share prices radically different in some cases and can I transfer the ASX ones over to the other market? – Bruce
To dual list, the company must first create a separate legal entity for each listing. For example, Rio Tinto Limited is the ASX-listed entity, while Rio Tinto PLC is the UK-listed entity. The two entities are owned by the same shareholders, but legally separate.
The profits and dividends are split based on the number of shares outstanding in each listing. If Rio Tinto Limited has 100 shares and Rio Tinto PLC has 50 shares, then one receives 66.67% of profits and dividends and the latter receives 33.33%.
When BHP used to be dual listed, its ratio of ADRs (American Depository Receipts) to ASX shares was set at 2:1. This was a common ratio at the time and designed to make ADRs more attractive to US investors.
It is possible to transfer your ASX-listed shares to another market where it is listed. This process is known as cross-border conversion. It’ll incur fees such as brokerage and stamp duty.
How do pre-market open and close work with regards to surplus volume? There is a volume indicator which climbs and falls. What does this mean? – Elias
Pre-market price and volume tend to be most volatile right before the market opens as traders and institutions don’t want to give away what and how much they’re trading.
You’ll often notice the surplus volume jump between negative and positive. But what does that mean? Let’s explore this via a hypothetical example below.
XYZ stock has an indicative open of $1.00 and surplus volume of 10,000. This suggests that 10,000 more shares have been ordered to be bought than shares that have been ordered to be sold at the indicative price.
Let’s say I’m really excited about XYZ stock and want to guarantee entry at the open. I place a buy order at $1.01 for 10,000 units. This will push surplus volume to 20,000.
Notwithstanding other factors that may influence the stock, a positive surplus is typically a bullish signal as it suggests there is more buying pressure on the stock. (Think about it as a lot of orders trying to push through one door)
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