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The shares were up 5.2 percent at $12.44 in morning trading after falling as much as 4.7 percent to $11.28 shortly after the market opened, their lowest point since their March debut.
Within just 45 minutes of regular trading, volume had already reached half of the stock's daily average for the past 10 days.
Starting on Monday, employees for the first time are allowed to sell their stock following the Snapchat parent's blockbuster initial public offering, potentially increasing the supply of shares in the market and their volatility.
Monday is also the deadline for hedge funds and other institutional investors to report their quarter-end holdings of U.S. equities.
T. Rowe Price Group Inc
Third Point LLC, Jana Partners and Temasek Holdings dissolved their stakes in Snap entirely, filings since Friday showed. Fidelity Investments, Snap's seventh-largest shareholder, said in filings last week that it cut its holdings by more than half, from more than 33 million shares to about 15 million.
Trading sentiment in Snap's options leaned toward bullishness. Contracts betting on the shares' rising above $14 by mid-September were the most actively traded for the company for the near term.
Monday's stock rise follows a disappointing quarterly report from Snap last week that sent its shares down 14 percent on Friday to a closing low of $11.83, far below its IPO price of $17.
Snap has also been a target of short sellers, with 5.5 percent of its shares outstanding shorted as of Thursday, according to Thomson Reuters data.
The stock holds a higher-than-average likelihood of a short squeeze, where the price rises as short sellers rush to cover their bets, according to Starmine data.
However, Ihor Dusaniswky, head of research at financial analytics firm S3 Partners in New York, said short-covering was not driving Monday's rally.
"There just isn’t enough stock being covered in order to have an impact on today’s stock price," Dusaniswky said.
Wall Street is increasingly worried that Snap is succumbing to competition from Facebook Inc's
Instagram, which has adopted features from Snapchat, has 250 million daily active users, compared with Snapchat's 173 million at the end of the second quarter, fewer than Wall Street had expected.
"We remain on the sidelines until we see signs of re-acceleration in user growth, an inflection on Snap pricing... and/or get closer to the end of the lock-up expiration," Cantor Fitzgerald analyst Kip Paulson said in a research note on Monday, lowering his price target to $15 from $17.
Snapchat is popular among people under 30 who like decorating their pictures with bunny faces and other filters. But following the IPO, investors have become more concerned that it might never become profitable.
With Monday's lockup expiry, employees are allowed to sell hundreds of millions of their shares for the first time since Snap's $3.4 billion market debut in March, the largest U.S. IPO in years.
That follows an expiry at the end of July on restrictions from early investors owning around 400 million shares.
To try to reassure investors, Snap Chief Executive Officer Evan Spiegel and co-founder Robert Murphy on Thursday committed to not sell any of their combined 422 million shares in 2017.
Close to 800 million shares become eligible for trading on Monday, including Spiegel and Murphy's stakes, according to JPMorgan analyst Doug Anmuth.
(Reporting by Noel Randewich, Lewis Krauskopf, Rodrigo Campos, Trevor Hunnicutt and Saqib Iqbal Ahmed; Editing by Lisa Von Ahn)
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