My take on this is that supply probably falls, but not as much...

My take on this is that supply probably falls, but not as much as you'd think. The amount of assets benchmarked to ASX300 from Australian investors is much larger than the 200, so the index strategies having to sell is quite a bit smaller. Foreign investors tend to hold Aussie stocks as part of a global allocation, which means FTSE or MSCI. ZIP remains a member of global small cap indices as far as I can tell, so they will continue to supply stock loan.

Demand for borrow also will fall at the same time as the SFE futures contract is based on the 200, so that means index-arb desks won't need as much for futures/cash arb. On balance, these effects are close to cancelling out. In the short term (no pun), index add/delete players would be looking to cover (if they haven't already), reducing demand for borrow. The index event is very well flagged and is a pretty big source as well as demand for liquidity and its effect is well overstated.

If you want a real short squeeze, try around the AGM season when people want to cast their vote. If you've lent your stock and you want to vote, you have to recall it, or instruct the borrower to vote the way you want. The borrower has to buy some or borrow from someone who doesn't care about the vote. You'll see borrow fees in some stocks really skyrocket around those record dates.