In the span of just three days, short sellers minted more than US$2 billion in paper profits as the collapse of Silicon Valley Bank set off a cascade of selling across the stocks of regional lenders.

The precise amount of the mark-to-market gains came to US$2.29 billion from Thursday to Monday, according to data compiled by S3 Partners. It was a frenetic stretch that saw the SPDR S&P Regional Banking ETF (KRE) — which includes SVB Financial Group — plunge the most since 2020.

The failure of Silicon Valley Bank and Signature Bank’s subsequent seizure by the Federal Deposit Insurance Corp. pushed the exchange-traded fund’s three-day selloff to 23 per cent. The ETF recouped some ground Tuesday along with the broader stock market as traders bet the worst of the turmoil had passed.

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The declines over those three days, however, “produced windfall profits for short sellers,” S3’s Ihor Dusaniwsky and Matthew Unterman wrote in a Tuesday report. About 98% of each dollar short in the sector over that span was profitable, they said.

For traders who bet against SVB or Signature, those paper gains amounted to almost 40 per cent of the total over that three-day period, according to S3 data. 

Unfortunately for those short-sellers, the shares have been halted, meaning the traders are sitting on “massive mark-to-market profits but have no way to realize those profits at the moment,” the analysts said.

For all of March, total mark-to-market profits across the regional-bank short positions tallied roughly US$3.5 billion as of Monday’s data, according to S3. Some of those winnings likely evaporated with Tuesday’s bounce in the hard-hit sector. 

In the view of the S3 analysts, the day’s move could spur a “wave of short covering in some of the regional banking stocks.” However, “when stock prices stabilize once again look for some of the shorts who trimmed or exited their positions to re-enter their fundamental-based shorts.”