PNC Bank Corp. continues to have the highest short interest among banks traded on the New York Stock Exchange.

Arbitrage activity related to its pending purchase of Midlantic Corp. pushed the number of PNC shares sold short to just over 40.3 million on Dec. 15, according to exchange data. That is about 17% of the Pittsburgh bank's shares outstanding.

Short playing involves the sale of borrowed shares. It is traditionally a bet that a stock will fall in value, allowing the borrowed shares to be repaid at a profit.

But market players increasingly use short positioning to hedge against investment risk and lock in profits in long positions.

In bank mergers, arbitragers often short shares of acquirers and buy those of sellers in order to profit from price differentials. As a result, short positions of acquirers rise steadily during the six months that bank deals typically take to complete.

After the Midlantic purchase, announced last July, is closed on Dec. 31, the short position in PNC's stock should plummet. That recently happened to short interest in Fleet Financial Corp. after the company completed the purchase of Shawmut National Corp.

The short position in Fleet shares plunged 56.6% in the month ended Dec. 15, to 10.7 million from 24.8 million shares.

The huge 14 million short-share decrease for Fleet and a 3.5 million short-share decrease for New York's Citicorp helped trigger a decline of 0.3% in the overall short interest in bank-related stocks traded on the New York and American stock exchanges from mid-November to mid-December.

By contrast, short interest rose 3.2% among all stocks on the New York exchange and increased 4.5% on the American Stock Exchange.

The short interest decline in Citicorp, to 8.5 million shares on Dec. 15 from 11.9 million shares a month earlier, is linked to the conversion of preferred stock issued by the company several years ago in its recapitalization program.

In fact, the short position in Citicorp has been falling steadily for six months. Last July, more than 22 million shares of the bank's stock were sold short.

Investors were seeking to lock in a better return by buying the bank's preferred stock and at the same time shorting the underlying common stock.

Citicorp conservatively estimated last summer that 50% to 75% of the common stock underlying the bank's Series 13 convertible preferred stock was being shorted. Series 13 is convertible into 36.2 million shares of Citicorp common stock.

Behind PNC, First Union Corp. was second among Big Board banks in short interest, at 10.9 million shares on Dec 15. First Union also has a large acquisition pending, of First Fidelity Bancorp.

Among the top five banks in short interest, Fleet was third, followed by Citicorp and then by Cleveland's National City Corp., which has a pending acquisition of Integra Financial Corp.

Subscribe Now

Access to authoritative analysis and perspective and our data-driven report series.

14-Day Free Trial

No credit card required. Complete access to articles, breaking news and industry data.