UK leads retail short-selling as bearish market drives up strategy in Q2

Short-selling saw a 34 percent boost on trading and investment platform Capital.com in Q2, according to the latest Pulse report from the firm.

Thirty-eight percent of traders using the platform carried out short-position trades last quarter – a figure 34 percent higher than in Q1 this year and one that marks the highest number of short-sellers on Capital.com since Q1 2020.

David Jones, chief market strategist at Capital.com, says the rising number of short-position traders in Q2 points to a shifting investor mindset as markets turn more bearish.

‘As a general rule, self-directed traders and investors seldom short-sell,’ he says in a statement accompanying the report. ‘They are so used to buying first and selling later that it’s psychologically very difficult for them to come out of this way of thinking.

‘Our findings show there has been a sharp rise in clients short-selling in Q2, which shows just how significant the drop in many markets has been. This may have forced many retail traders to change their mindset.’

The company’s research finds that the UK leads on short-selling, with the highest proportion of short trades coming from that country, followed by Africa and Asia (41 percent). The lowest proportion of short trades is seen in Australia (34 percent).

Jones says the trend is interesting: ‘One explanation for this could be the relative resilience of the Australian stock market index this year. The ASX 200 only started falling in May – it has been volatile but broadly sideways for much of the year since then. 

‘Perhaps Australian clients felt somewhat insulated from the market meltdown that was under way in most other areas of the world, so have come to short-selling a little later than those in other regions.’

Capital.com also finds that short-selling was slightly more profitable (recording a higher percentage of profits at 32.1 percent) than long-position trades (28.7 percent) over Q2.

‘The ability to short-sell could well have an impact on traders’ overall profit and loss,’ continues Jones. ‘This could be particularly true if we enter a period of prolonged weakness in markets, where investors stop being rewarded for just blindly buying the dip. Using sensible risk control measures such as stop-losses in tandem with short-selling could be a prudent addition to a trader’s overall strategy.’

Shorting the index

Among the most-shorted strategies across the quarter were indices, with traders finding that shorting the Nasdaq 100 was more profitable in Q2 (33.7 percent) than long positions (32.6 percent). 

‘Buying the dips was a very profitable strategy through much of 2021,’ says Jones. ‘It has of course been a different story this year with the Nasdaq 100 under pressure for much of the year so far. The index had a strong bounce back toward the end of March – but once again this rally hit the buffers, and the index lost 22 percent in the second quarter.

‘Perhaps traders that had been trying to buy the dip in the first quarter – and getting their fingers burnt – decided to throw in the towel and join the short-sellers in the second quarter.’ He adds that ‘the Nasdaq 100 did show the tentative signs of trying to form a base during June, which should make for an interesting third quarter as the battle between the bulls and bears continues.’