Sorry guys but if you are looking for valuable metrics on short sales, looking at the “Short Volume” report is the wrong place to look. This is a report of all “marked” short sales in a given day but many of those shorts are not originated by a short seller but a long seller. Let me explain:
If you are a long and want to sell, you place your order with your broker-dealer (BD), if that BD is not a market maker in that stock they route your trade to a market maker for execution. Let’s use 100,000 shares as the example.
Because the market maker does not want to get stuck with a loss or any shares, they go into the market and execute 9 separate orders at 10,000 shares each. They do so by selling first (short sale) and then turn around and buy the exact same quantity from your BD to close out their position and settle the trade. Since the MM sold in the media market (the one you see) but bought in a non-media market since it was the second leg of the single order, only the short sale is reported to the system. This is called a riskless principle trade.
Notice I said they executed qty. 9 10,000 share trades. The industry set up this process to insure that the market maker is not stuck with the shares. If the MM had to buy the stock first to trade it, they would own 100,000 shares but was only able to execute 90,000 at the price offered. They would be stuck with a 10,000 share investment they do not want. This riskless principle rule allows them to sell what they can and buy the same amount back to cover the trade.
Bottom Line: Much of the short volume number represents routed trades and not short sales. This comes from the regulators I speak to but can be backed by the fact that almost 50% of all trades are represented in this volume regardless of the stock trading.
If you are looking for short sales, go to the bi-monthly short interest report and monitor the FTD report posted by the SEC.
