Tesla is on the brink of a major shift that will completely change how its stock trades

  • Tesla chief executive officer Elon Musk has long been an outspoken critic of short seller behavior that's made his company the most shorted in the US equity market.
  • Financial analytics firm S3 Partners has compiled data to suggest it's getting much more difficult to short Tesla, and it explains how this could permanently alter how the stock is traded.

If you pay attention to Elon Musk's public comments — or simply follow him on Twitter — then you know he loathes traders who short Tesla's stock.

Well, the outspoken chief executive may be in for a treat, at least if the latest findings from financial analytics firm S3 Partners are to be believed.

S3 finds that investors are quickly approaching the maximum number of shares able to be held short. On May 3, short interest in Tesla spiked to more than 40 million shares, moving closer to the cap of roughly 47 million, as estimated by S3.

"If short selling demand continues to grow at this pace, short sellers will feel the angst that Tesla Model 3 buyers are feeling — with demand outstripping supply," Ihor Dusaniwsky, S3's managing director of predictive analytics, wrote in a recent report.

Dusaniwsky also notes stock-borrow fees are rising, which could climb to more than 10% once short interest nears 45 million shares. For comparison, the fees were a meager 0.75% as recently as October 2017, S3 finds.

"If short selling continues to increase and rates hit the 10% fee level it will cost between $2-$4 million per day to finance the entire Tesla short book," Dusaniwsky said.

It's also possible that Tesla short sellers will soon bump up against the limit of shares they're allowed to hold in a stock, according to S3. These types of restrictions are designed to keep one bad trade from destroying an entire portfolio, and it could wind up benefiting Tesla's stock in the long run.

These limits also lead to increased covering of short positions when Tesla's stock rises, because investors have to reduce the dollar amount of their exposure. And that covering, in turn, pushes shares even higher, making life even more difficult for the remaining shorts.

Now time for the million-dollar question: What does this mean for the overall trading of Tesla's stock in the immediate term?

According to Dusaniwsky, it'll shift the onus towards long shareholders, who are more inclined to trade based on core company fundamentals — not on Musk's dreaded "short thesis."

"Lack of stock loan supply, increased stock loan costs and tapped out risk limits will eventually curtail short selling in Tesla," he said. "As we get closer to this happening, Tesla’s stock price will be more and more dependent on long shareholder buying and selling – the shorts will be on autopilot and the long’s will be in the driver’s seat." 

RELATED: Take a look at Elon Musk through the years:

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Elon Musk through the years
Elon Musk, founder, CEO and lead designer at SpaceX and co-founder of Tesla, speaks at the International Space Station Research and Development Conference in Washington, U.S., July 19, 2017. REUTERS/Aaron P. Bernstein
Elon Musk, founder, CEO and lead designer at SpaceX and co-founder of Tesla, speaks at the International Space Station Research and Development Conference in Washington, U.S., July 19, 2017. REUTERS/Aaron P. Bernstein
Tesla Motors CEO Elon Musk takes the stage to speak at the National Governors Association Summer Meeting in Providence, Rhode Island, U.S., July 15, 2017. REUTERS/Brian Snyder
FILE PHOTO: Tesla Chief Executive, Elon Musk enters the lobby of Trump Tower in Manhattan, New York, U.S., January 6, 2017. REUTERS/Shannon Stapleton/File Photo
Elon Musk, Chairman of SolarCity and CEO of Tesla Motors, speaks at SolarCity's Inside Energy Summit in Manhattan, New York October 2, 2015. SolarCity on Friday said it had built a solar panel that is the most efficient in the industry at transforming sunlight into electricity. REUTERS/Rashid Umar Abbasi
Tesla Motors Inc CEO Elon Musk unveils a new all-wheel-drive version of the Model S car in Hawthorne, California October 9, 2014. Tesla Motors Inc on Thursday took its first step toward automated driving, unveiling features that will allow its electric sedan to park itself and sense dangerous situations. The company also said it will roll out an all-wheel drive option of the Model S sedan that can go from zero to 60 miles per hour in 3.2 seconds yet doesn't compromise the vehicle's efficiency. Musk said "D" stands for "dual motor," meaning Tesla's all-wheel drive vehicle will have a motor at either end of the chassis to increase control. REUTERS/Lucy Nicholson (UNITED STATES - Tags: TRANSPORT SCIENCE TECHNOLOGY BUSINESS HEADSHOT)
Tesla Motors Inc CEO Elon Musk unveils a new all-wheel-drive version of the Model S car in Hawthorne, California October 9, 2014. Tesla Motors Inc on Thursday took its first step toward automated driving, unveiling features that will allow its electric sedan to park itself and sense dangerous situations. The company also said it will roll out an all-wheel drive option of the Model S sedan that can go from zero to 60 miles per hour in 3.2 seconds yet doesn't compromise the vehicle's efficiency. Musk said "D" stands for "dual motor," meaning Tesla's all-wheel drive vehicle will have a motor at either end of the chassis to increase control. REUTERS/Lucy Nicholson (UNITED STATES - Tags: TRANSPORT SCIENCE TECHNOLOGY BUSINESS HEADSHOT)
Tesla Motors Inc Chief Executive Elon Musk speaks during a news conference in Tokyo September 8, 2014. Musk said on Monday that he would not be surprised if there was a significant deal with Toyota Motor Corp in the next two to three years, though there were no definitive plans. REUTERS/Toru Hanai (JAPAN - Tags: BUSINESS TRANSPORT)
Elon Musk, CEO of Tesla Motors, waves during a news conference to mark the company's delivery of the first batch of electric cars to Chinese customers in Beijing April 22, 2014. REUTERS/Stringer (CHINA - Tags: TRANSPORT BUSINESS) CHINA OUT. NO COMMERCIAL OR EDITORIAL SALES IN CHINA
CEO & CTO of SpaceX and CEO & Chief Product Architect of Tesla Motors Elon Musk receives The President's Award for Exploration and Technology at the 110th Explorers Club Annual Dinner at the Waldorf Astoria in New York March 15, 2014. The club, which promotes the scientific exploration of land, sea, air and space featured catering for the event by chef and exotic creator Gene Rurka. Chef Rurka prepared a variety of dishes featuring an array of insects, wildlife, animal body parts and invasive species. REUTERS/Andrew Kelly (UNITED STATES - Tags: SOCIETY BUSINESS SCIENCE TECHNOLOGY FOOD)
Tesla Motors CEO Elon Musk talks at the Automotive World News Congress at the Renaissance Center in Detroit, Michigan, January 13, 2015. REUTERS/Rebecca Cook (UNITED STATES - Tags: TRANSPORT BUSINESS)
SpaceX CEO Elon Musk speaks after unveiling the Dragon V2 spacecraft in Hawthorne, California May 29, 2014. Space Exploration Technologies, or SpaceX, on Thursday unveiled an upgraded passenger version of the Dragon cargo ship NASA buys for resupply runs to the International Space Station. REUTERS/Mario Anzuoni (UNITED STATES - Tags: POLITICS TRANSPORT SCIENCE TECHNOLOGY SOCIETY)
Tesla Motors CEO Elon Musk poses at the premiere of the documentary "Revenge of the Electric Car" in Los Angeles October 21, 2011. REUTERS/Mario Anzuoni (UNITED STATES - Tags: ENTERTAINMENT TRANSPORT BUSINESS PORTRAIT)
Elon Musk, Chief Executive of Tesla Motors and SpaceX, attends the Reuters Global Technology Summit in San Francisco June 18, 2013. REUTERS/Stephen Lam (UNITED STATES - Tags: BUSINESS SCIENCE TECHNOLOGY TRANSPORT)
Tesla Chief Executive Officer Elon Musk leaves a press event at his company's factory in Fremont, California, June 22, 2012. Tesla began delivering its Model S electric sedan to customers on June 22. REUTERS/Noah Berger (UNITED STATES - Tags: TRANSPORT SCIENCE TECHNOLOGY BUSINESS)
SpaceX founder Elon Musk pauses at a press conference following the first launch of a SpaceX Falcon Heavy rocket at the Kennedy Space Center in Cape Canaveral, Florida, U.S., February 6, 2018. REUTERS/Joe Skipper
SpaceX founder Elon Musk listens at a press conference following the first launch of a SpaceX Falcon Heavy rocket at the Kennedy Space Center in Cape Canaveral, Florida, U.S., February 6, 2018. REUTERS/Joe Skipper
Tesla Motors CEO Elon Musk waves as he leaves the stage after speaking at the National Governors Association Summer Meeting in Providence, Rhode Island, U.S., July 15, 2017. REUTERS/Brian Snyder
89th Academy Awards - Oscars Vanity Fair Party - Beverly Hills, California, U.S. - 26/02/17 ? Elon Musk. REUTERS/Danny Moloshok
Tesla Motors CEO Elon Musk speaks during the National Governors Association Summer Meeting in Providence, Rhode Island, U.S., July 15, 2017. REUTERS/Brian Snyder
Elon Musk, founder, CEO and lead designer at SpaceX and co-founder of Tesla, arrives at the SpaceX Hyperloop Pod Competition II in Hawthorne, California, U.S., August 27, 2017. REUTERS/Mike Blake
Tesla Chief Executive Elon Musk attends a forum on startups in Hong Kong, China January 26, 2016. REUTERS/Bobby Yip
Tesla CEO Elon Musk speaks about new Autopilot features during a Tesla event in Palo Alto, California October 14, 2015. REUTERS/Beck Diefenbach
Tesla founder Elon Musk arrives for the the annual Allen and Co. media conference Sun Valley, Idaho July 7, 2015. REUTERS/Mike Blake
AUSTIN, TX - MARCH 11: Elon Musk speaks onstage at Elon Musk Answers Your Questions! during SXSW at ACL Live on March 11, 2018 in Austin, Texas. (Photo by Chris Saucedo/Getty Images for SXSW)
AUSTIN, TX - MARCH 11: Elon Musk speaks onstage at Elon Musk Answers Your Questions! during SXSW at ACL Live on March 11, 2018 in Austin, Texas. (Photo by Diego Donamaria/Getty Images for SXSW)
AUSTIN, TEXAS - MARCH 10: Elon Musk speaks on stage during the Westworld Featured Session during SXSW at Austin Convention Center on March 10, 2018 in Austin, Texas. (Photo by FilmMagic/FilmMagic for HBO)
AUSTIN, TX - MARCH 10: Elon Musk, CEO of SpaceX speaks onstage during SXSW at Austin Convention Center on March 10, 2018 in Austin, Texas. (Photo by Amy E. Price/Getty Images for SXSW)
BERLIN, GERMANY - NOVEMBER 08: Elon Musk attends the 'Goldenes Lenkrad' Award at Axel Springer Haus on November 8, 2016 in Berlin, Germany. (Photo by Tristar Media/WireImage)
Tesla Motors CEO Elon Musk speaks at a press conference during the 67th International Astronautical Congress in Guadalajara, Mexico on September 27, 2016. / AFP / HECTOR GUERRERO (Photo credit should read HECTOR GUERRERO/AFP/Getty Images)
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Musk's storied history of short seller hatred

To truly appreciate just how much Musk dislikes short sellers, look no further than his Twitter account.

He lobbed his latest grenade on Friday, capping off a tweetstorm that saw him double down on comments made during a contentious quarterly earnings call last Wednesday.

"Looks like sooner than expected," he tweeted in response to a story about time running out for short sellers. "The sheer magnitude of short carnage will be unreal. If you’re short, I suggest tiptoeing quietly to the exit …"

The comments were just the latest entry into Musk's grand anti-short seller crusade. Over the past year, he's forged a combative relationship with Tesla skeptics, calling them "jerks who want us to die" in a Rolling Stone profile last year, and describing their behavior as "hurtful."

Further, Musk fired off a tweet last June in which he said short sellers "want us to die so bad they can taste it." In early April, after a period of considerable stock strength, the CEO even went as far as to taunt Tesla's detractors, tweeting, "Stormy weather in Shortville."

And despite Musk's myriad efforts, Tesla remains the most popular short in the US equity market — a designation it has held for much of the past two years. Short interest, a measure of bets that a stock will drop, sits near $11 billion, outpacing the next-most-shorted company, Apple, by more than $1.5 billion, according to S3 data.

Screen Shot 2018 05 04 at 7.37.38 AMS3 Partners

While Tesla certainly has its share of skeptics, another explanation for the exorbitantly high level of shorting activity is that the company and its mega-cap tech peers are being used as proxies to hedge against the broader stock market, according to S3.

That includes the likes of Apple, Amazon, Netflix, Microsoft, Facebook, and Alphabet, which are all included in the most-shorted list above. The wisdom behind the hedging strategy is that as these huge, influential stocks go, so does the market — so taking a short position in them means protecting against an index drop.

In the end, it's a vast understatement to say short sellers have Musk's attention. And if the scenario laid out by S3 ends up coming to fruition, it looks like he'll have the last laugh.

Screen Shot 2018 05 07 at 11.55.08 AMMarkets Insider

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