What happened

Shares of Snapchat parent Snap (NYSE:SNAP) have jumped today, up by 5% as of 1:30 p.m. EDT, after S3 Partners released a report yesterday afternoon suggesting that 5 million Snap shares being held short have been recalled. S3 Partners specializes in real-time analysis of short-sellers.

So what

The report suggests that recent gains in Snap shares could be attributed to a short squeeze that is being driven by stock recalls. Short-sellers borrow shares and then sell them in the open market, hoping to subsequently buy them back at a lower price.

However, if the owner of those shares chooses to sell them, the stock lenders may no longer have access to them, in which case they must recall any shares that are currently being loaned out to short-sellers.

Now what

The low supply of shares available to lend is also driving up borrowing costs, which have spiked to hit 45% but averaged around 40% yesterday. Borrowing costs are quoted on an annualized basis, and higher borrowing costs discourage short-selling. For comparison, borrowing costs for Snap shares averaged around 16% in 2017, S3 notes.

"Stock borrow rates on existing short positions will increase gradually over the next week, with rates moving into the 10% to 20% fee range tomorrow and nearing the 40% level soon if recalls continue and supply remains tight," writes S3 Managing Director of Predictive Analytics Ihor Dusaniwsky. Snap shares are up over 20% month to date, but S3 argues that stock loan recalls and rising borrowing costs are more likely to create a short squeeze than recent gains.

Evan Niu, CFA has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.