Haven't checked the numbers, but if it's true, shorting began in earnest because the cost to borrow went from 95% to (a still pretty obscene) 30%. At 95%, to make money on a year-long short the stock would have to drop to pennies. At 30%, it still needs to be a massive dog, but it's doable.
The sudden explosion in shorting caused by this drop in cost to borrow is probably seen as a negative signal and making some investors nervous, causing the stock to drop as they sell it off.
But the cost to borrow doesn't normally drop from 95% to 30% in the absence of a lot of newly-issued shares. So why did this happen? Someone must have made a large number of shares available to borrow - so the question here is who was it and why did they do it?
With the Groupon float so teeny, it's a lot easier to manipulate pricing. This could be completely straightforward and boring, but this could be an institution with advance notice of some favorable information about Groupon setting naive investors up for a classic short squeeze. (Good news comes out, some shorters panic and buy to cover their shorts, increased demand causes prices to rise, more shorters panic... iterate your way to a massive pop and a whole lot of severely-burned shorters.) This would be a good way to compensate for the inevitable drop when the lock-up period expires.
TL;DR - Don't buy or short individual stocks without fully understanding what's going on, and that goes beyond the fundamentals of the business.
>The sudden explosion in shorting caused by this drop in cost to borrow is probably seen as a negative signal and making some investors nervous, causing the stock to drop as they sell it off.
I'm still trying to learn how investing and markets work, but isn't this stock manipulation? I mean, if I get a bunch of people to agree to short this stock, and others observe this happening, then the short will come through by virtue of a fall in share price because people saw that I was shorting.
I'm still trying to wrap my head around how markets work, when making observations on the system necessarily changes the system, rendering your original observation invalid.
That's just the inverse of going long on a stock: Other people observe you buying up many shares of a stock, causing the price to go up, which in turn causes your long bet to come through. The degree that this changes the market depends on how well-respected a trader you are.
For example, if Warren Buffett invests in a company, that company's stock generally rises. That's why Warren Buffett was able to get sweetheart deals when he made short-term loans to Goldman, Sachs and Bank of America recently. They were willing to pay him billions of dollars just for his imprimatur. Buffett received options to buy shares of their stock at the much lower, pre-bump price.
It's not really stock manipulation, though. If you're big enough, or respected enough, you have to expect your trades to move the market.
Not necessarily. It's completely normal for borrow rates to be ~100% shortly after IPO, it takes a few days for the stock borrow market to settle on a more realistic rate. I wouldn't read much into the drop, and remember that rates different based on your account status and broker, so it's not 30% for everyone.
The sudden explosion in shorting caused by this drop in cost to borrow is probably seen as a negative signal and making some investors nervous, causing the stock to drop as they sell it off.
But the cost to borrow doesn't normally drop from 95% to 30% in the absence of a lot of newly-issued shares. So why did this happen? Someone must have made a large number of shares available to borrow - so the question here is who was it and why did they do it?
With the Groupon float so teeny, it's a lot easier to manipulate pricing. This could be completely straightforward and boring, but this could be an institution with advance notice of some favorable information about Groupon setting naive investors up for a classic short squeeze. (Good news comes out, some shorters panic and buy to cover their shorts, increased demand causes prices to rise, more shorters panic... iterate your way to a massive pop and a whole lot of severely-burned shorters.) This would be a good way to compensate for the inevitable drop when the lock-up period expires.
TL;DR - Don't buy or short individual stocks without fully understanding what's going on, and that goes beyond the fundamentals of the business.