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I was asked a number of times this week about how short interest could exceed shares outstanding (or float), so I thought I would share some thoughts here
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I think the easiest way to understand is to think about each of the shares outstanding as being a real thing which exists somewhere. Every day each share will settle into someone's custody.
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The settlement cycle allows for advance knowledge of where the shares need to be in order to settle a given day's trading. It also allows those who will have custody to lend their shares for a given settlement date.
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To answer the question of how you could have short interest > shares outstanding, the process of getting there is the key. Every day each one of the shares outstanding could be lent to short seller to settle a short sale, thereafter remaining on loan until one side unwinds.
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The only impossibility is that short interest could increase by more than shares outstanding in a single day. That's also an important interpretation of the % shares short metric, if it's > 100% then it is certain that the entire short position couldn't be covered in a day
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Once a short seller borrows shares and sells them, both they and the counterpart they borrowed the shares from are effectively out of the picture unless one of them wants to unwind their trade.
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As an example, imagine a simple market where there is one shareholder and one short seller. On day 0 the shareholder owns 100% of shares outstanding and the short seller has no position. On day 1 short seller borrows 10 shares and short sells them back to shareholder.
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Repeating that process until day t when the short seller has borrowed and short sold 100% of the shares outstanding to the shareholder. On that day the shareholder is long 200% shares outstanding, but only has 100% in custody bc other 100% on loan to short seller
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On day t+1 the shareholder could make any amount of shares available for borrow up to 100% of shares outstanding, and so the short interest, while already 100% of shares outstanding, could increase by up to 100% shares outstanding that day
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In practice less than 100% of shares outstanding are made available to borrow from shareholders at a theoretical starting point and then not all of the buyers from short sellers will make those shares available.
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It's important to note that what 'consumes' shares in this process, ie. limits where short interest could get to a % of shares outstanding, is the willingness to lend on the part of share holders
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That is driven by a combination of factors including shareholders who don't lend at all (both retail and institutional) and a large number of institutions who make fewer than their entire holding available or only lend above certain fee thresholds
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Going back to the example, imagine if the shareholder only made 1/2 the shares bought from the short seller available for borrow. On day t there would only be 50% of shs out available for borrow...
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....so max increase in shorts on that day would be 50% (currently avail for borrow), but max decrease would be 100% (current short position at that time)
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Now further imagine that on day t the company that issued the shares comes to share holder and offers to buy the shares back. The share holder has up to 100% of shares outstanding in their custody that they could sell, so let's say they sell 50% of them
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That means that shares outstanding just got cut in half AND now the short seller, who was previously short 100% of shares outstanding just became short 200%
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Important to note that nothing needed to change about the short position, borrow, loans etc. The current holder of the shares, who had purchased all of them from the short seller, decided to sell half of them back to the company.
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This does mean that the short sellers ability to cover the position quickly has changed. If on day t the shareholder had made 100% of shares available again they could have covered the entire position in a day. But now that half the shares were bought back...
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...they would need to buy 100% of the (now lower outstanding) shares on day t, return the shares to the shares holder, and then buy 100% again on t+1 to return them again in order to unwind the trade.
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Needless to say a very simplified example, but hopefully helps to explain the dynamics.
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The willingness to lend on part of share holders is key and varies by firm and with share turnover (whether by selling or lending shares)
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What matters for short sellers today is whether existing loans for open short positions will be recalled and if so will the current holders of shs out will make them avail to replace the recalled loan (or new loans if they want to add to the position)
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'100% shares outstanding short' has an interpretation regarding the possible settlement of buys to cover in a single day, which, given the portion of shares typically made available for borrow, would be considered extreme
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Regardless of the current short position, every one of shs out will settle into someone's custody today and they could lend to settle a new short sale. The purchaser of the shares from the short seller would then face the decision to lend/sell/do-nothing each day
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