By Paul R. La Monica

Investors who bet against Nvidia on Monday made a killing, but shorting the stock may now be tougher and borrowing costs may rise, making it costlier to bet against the AI chip giant.

The stock, along with Broadcom, another chip company hit hard in Monday's DeepSeek selloff, was restricted from short-selling on the Interactive Brokers platform Tuesday morning after triggering a Securities and Exchange Commission circuit breaker known as the "uptick rule."

That rule can put the brakes on shorting a stock after shares decline more than 10% from their previous close. It can come into effect as a kind of circuit breaker to prevent hedge funds and other traders from ganging up on a stock, essentially requiring short-sellers to wait in line behind traders seeking to sell their shares.

It's unclear if the pause was widespread. Shares appeared available for shorting on the Fidelity platform on Tuesday, for instance. The Nasdaq exchange, where Nvidia is listed, told Barron's it was looking into the matter.

Shares rebounded Tuesday afternoon, trading up more than 6%. Steve Sosnick, chief strategist with Interactive Brokers, told Barron's that the uptick rule would last the rest of Tuesday. Barring another 10% decline, short sellers will no longer have to wait in line come Wednesday.

Betting against Nvidia has been an awful trade for short sellers. But it was terrific on Monday. The stock's 17% plunge led to a one-day profit of $6.56 billion for Nvidia shorts, according to research from S3 Partners. Nvidia shorts are now up nearly 11% for the year on this trade.

Investors who bought leveraged single stock exchange-traded funds in Nvidia -- which amplify their short or long positions in a company through the use of financial derivatives and debt -- made an even bigger profit Monday.

The Tradr 1.5X Short NVDA Daily ETF and GraniteShares 2x Short NVDA Daily ETF surged 25% and 34% respectively Monday as Nvidia's stock tanked. Both ETFs fell Tuesday as Nvidia's stock bounced back.

Short sellers bet against stocks by borrowing shares and selling them, hoping to profit from buying back the stock at a lower price and pocketing the difference when returning the shares. If the stock price keeps climbing, short sellers could lose their shirts since they eventually have to repurchase the stock at a higher price than what they sold it at.

Monday's gains from the selloff still pale in comparison to the massive amount of money lost by traders shorting Nvidia, according to Ihor Dusaniwsky, managing director of predictive analytics for S3 Partners.

The stock has been one of the market's best performers for the past few years thanks to demand for its AI chips. Nvidia soared more than 170% last year, for example. As a result, Dusaniwsky said Nvidia shorts lost $24.24 billion in 2024, a decline of 81.3%.

Only about 1.2% of Nvidia's total float was being held short as of Monday, Dusaniwsky said, a sign the market is almost uniformly lined up in support of the stock.

Whether short interest will start to creep up is an open question as Nvidia becomes more of a battleground stock.

Dusaniwsky expects the shorts to be kept at bay. While Monday's plunge "helped settle the nerves of the more jumpy NVDA short sellers and helped them recoup a sliver of their 2024 mark-to-market losses, the move should not lure a large new cadre of short sellers since most NVDA short sellers are already in the trade," he said in an email. He added that if Nvidia continues to drop, shorts may add to their exposure, "but its volatility and upward stock price bias will limit surges in short selling."

Short sellers overall tend to be more wary of megacap stocks because they are more widely followed by analysts who tend to be bullish and have support from big institutional investors, including index funds and actively managed accounts.

Melissa Roberts, an analyst with Stephens, said in a report Tuesday that short interest for the broader market was just 1.9% of total shares as of mid-January. Meanwhile, short interest in small and mid-cap stocks accounted for 6% of the market, up slightly from the end of December.

Others aren't so sure the shorts will now stay away from Nvidia. The emergence of potentially cheaper AI technology from DeepSeek and other Chinese companies may have changed the equation for Nvidia and other companies that got a big bump in 2024 due to AI hype.

Armando Gonzalez, CEO of RavenPack, a financial data provider for hedge funds and asset managers, said in an interview with Barron's that the Nvidia selloff was a "good wake-up call around the real value of large language models" and that there is now a "risk of [AI technology] becoming more commoditized."

Investors betting against the AI leader probably should still tread cautiously. Nvidia is still the king of AI and that likely won't change overnight.

Write to Paul R. La Monica at paul.lamonica@barrons.com

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January 28, 2025 14:00 ET (19:00 GMT)

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