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Short Volume

by Brent Threadgill, eSignal Product Manager

Short Volume is a new market statistic that can be used to assist you in your investment decision process. Short Volume is the daily aggregated number of shares sold short for individual U.S.-listed stocks during the previous market session. Short Volume differs from short interest, which is a stock's total shares sold short and not yet repurchased (short interest is also reported bi-weekly instead of daily).

For investment decision making, Short Volume can be compared to other daily statistics, such as volume, price -- even news stories, as well as less timely data, such as short interest or a stock's average volume (more than 10, 25, 50 days, etc.). In summary, Short Volume is a new, daily and factual account of market activity that may assist you in your investment decision methodology.

What Short Volume Is

Short Volume has been reported by the NYSE and NASDAQ since mid-2009 as part of the SEC's short-selling rules that associate with Regulation SHO ("Reg SHO") provided as a daily report of the number of shares sold short for those traded stocks. It's the combined daily short sales from bearish investors, market makers and / or money managers whose actions have no directional expectation.

Bearish investors can short stock by selling shares they don't own, anticipating a decline in the stock's price, after which the shares will be repurchased. On the other hand, market makers frequently sell stocks short to provide liquidity (i.e., selling to clients who want to buy, then quickly buying -- or "covering" -- those shares back); money managers may hedge existing positions or engage in arbitrage situations by selling short.

For example, on April 4, 2011, IBM had Short Volume of 487,106 shares. That's information, but just how many shares were shorted by bears (who expect the stock to decline) is not known.


What Short Volume Is Not

Short Volume shouldn't be confused with Short Interest, which is different in several ways. For one thing, Short Volume is reported by exchanges daily, compared with Short Interest, which is released every two weeks. Perhaps, more importantly: Short Interest is the number of shares of a stock that have been sold short and not yet repurchased (or "covered") while Short Volume is the number of shares sold short during a market session.


How Short Volume Can Be Used

A stock's Short Volume can be compared with other market statistics, adding perspective to your investment decisions. For example, if a stock's Short Volume suddenly increases, but its daily volume remains stable, it may indicate bearish transactions before the twice-monthly short interest report. Alternatively, comparing stocks' short volumes may have value. A 2008 study reported that "stocks heavily shorted tended to underperform those lightly shorted by an average of 1.2 percent over the course of 20 trading days." 1. For trading and clearing firms, Short Volume can assist compliance with Reg SHO, by comparing it to executions marked "short" and security lending.

Why Short Volume Is an Important New Statistic for Traders to Watch

In summary, Short Volume is a recent market metric reported daily by NYSE and NASDAQ as part of the SEC's continuing regulation efforts associated with Reg SHO. Short Volume is different from short interest, which is a bi-weekly report of shares that have been sold short and not yet repurchased. As a daily market statistic, a stock's Short Volume can be compared against its other daily activities or news, longer-term metrics such as average volume, other stocks, or as a compliance tool for trading and clearing firms. Short Volume is used in the industry by individuals, professionals and organizations, making it an important new statistic to understand.

1 "New Short Stats Speak Volumes. That's It", Wall Street Journal, September 17, 2009

July 2011
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