Rising equity market values during the early months of 2025 led to a sharp drop in the percentage of short positions that were “out of the money” (i.e., currently unprofitable). At the height of the tariff concerns, this figure dropped to just 16%, its lowest level of the year, as falling stock prices made many short positions profitable.
However, with the market showing signs of stabilization and recovery, this metric has begun to normalize, following an upward trend. As of May 2025, the percentage of shorts out of the money has risen back to 70%, indicating that a majority of short positions are now under water, potentially limiting further downside risk and suppressing further shorting activity across the TSX60 index, wrote Matthew Chessum, director of Securities Finance at S&P Global Market Intelligence.
“Despite recent headwinds, there are reasons for cautious optimism in the Canadian securities lending market. The Bank of Canada has begun lowering its policy rate, most recently to 2.75%, with expectations of further cuts throughout 2025. This pivot toward growth-oriented monetary policy marks a significant shift from the inflation-fighting stance of the past two years,” Chessum wrote.
DRIPs decline
High inflation and elevated interest rates in Canada over the past few years have contributed to a decline in the number of companies offering Dividend Reinvestment Plans (DRIPs). As borrowing costs rise, companies face tighter financial conditions and are more cautious with capital allocation, often opting to preserve cash rather than issue discounted shares through DRIPs.
This shift has implications for the broader equity market. DRIP dividends in Canada have historically driven demand for equities, particularly among securities lending participants. Many Canadian firms offer DRIP shares at discounts of up to 5%, creating arbitrage opportunities: investors can short the stock before the dividend record date, borrow shares to cover the position, and then repurchase them at a lower effective cost due to the DRIP discount.
This activity temporarily increases the demand to borrow shares, pushing up loan fees and generating profitable “specials” for lenders. With fewer DRIP programs available, these arbitrage opportunities diminish, reducing both the demand for borrowing and the secondary market activity that supports Canadian equity valuations.