Bullshit article: Short Selling:Instead of buying low and selling high, you sell high in hopes of buying back those shares at a lower price. You borrow "bought" shares and sell them, then you need to complete the transaction by buying those shares at a lower price...
the upside potential is 99% or less where as when you buy you can go up 100's of %'s
Short volume is caused by normal market making transactions, and is only recorded on the initial leg of a Multi leg transaction. A good example is an "internalized order" in which someone uses a market order sale, which is picked up up by an MM and sold by that MM over the spread. Due to the MM not actually having physical custody of the shares it must be marked "short" by SEC Rule 200. Other good examples would be new shares from warrant, debt and note holders in accordance with SEC Rule 203 require marking such trades as "short" as part of risk exposure due to potential restricted legends not being removed and causing a trade rejection.
So let me know if you want to understand such reporting and why it occurs. The main purpose of the Reg Sho Daily is simply settlement rates from trade inception and nothing more. When combined with the FTD report one can use that information and conclude substantial short volume within a security if such substantial short volume exists with failed trades.
Yet short volume has NOTHING to do with Short Positions taken against a security. It is also not indicative of abusive NSS either. In fact short volume is quite normal and is mitigated on other legs of the trading transaction within seconds if not minutes. In fact they have up to T+3 to settle trades and rarely if ever need the time, so much so FINRA is looking at T+1 for future trades.
So what exactly is one supposed to gather from short volume? Nothing at all, in fact the only data worthwhile discussing is excessive FTDs and significant short INTEREST on the Bi Monthly Report.
When you short sell a stock, your broker will lend it to you from the brokerage's own inventory. The shares are sold and the proceeds are credited to your account. Sooner or later, you must "close" the short by buying back the same number of shares (called covering) and returning them to your broker. If the price drops, you can buy back the stock at the lower price and make a profit on the difference.
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I will clarify this once here and then watch and see bogus theories to perpetuate confusion continues.
Short Volume is vastly different than short sales. In fact, a majority of all short volume reported is in fact originated by a long seller who had his/her trade ROUTED thru a market maker (i.e. no short at all).
In a routed trade Client A holds an account with Broker A. When Client A wants to sell stock they create a trade demand thru their Broker. But since Broker A does not make a market in that stock they must route the trade request to a market maker B. The market maker B does not have in their posession the shares as they remain in the posession/custody of Broker A since a trade request is no guarantee of a trade execution.
Market Maker B goes into the market and executes a sale of Client A's shares without those shares in their posession. This trade is marked short exempt and is tallied in the short sale volume statistics. Market Maker B then immediately turns to Broker A and does a purchase of exact share execution to settle their books (net zero) and to begin the execution of trade settlement. This second trade is not recorded as public trade and trade volume as the only 'public market trade' is the first leg of the trade path.
Because there are many brokers and limited market makers, a majority of trades get executed this way which is why the market as a whole presents a very high percentage of short sale volume. I suggest you look at the NYSE in total, the NASDAQ in total and calculate what the market average short sale voilume is. What you will find is that 40, 50, 60% is the norm. You can equally go back in history when there was a short sale ban on certain stocks and look at the short sale volume numbers. They did not change radically and the regulators took no actions meaning the short sale volume was NOT actual short sales.
These are the facts and they can not be disputed. Using these figures you present to say anything otherwise would be extremely misleading.
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Many uneducated investors think that an MM shorts a stock like a regular investor and makes money when the stock goes down. That's not what is happening at all. The "short volume" in this case only means that out of the roughly 160,000 shares bought on that day the MM was unable to deliver for whatever reasons 116,331 shares on that day. The MM was "short" that many shares. In this case it was most likely because there was so few shares sold on that day and there was a large imbalance. The MM is there to make a market and create liquidity so we can buy an sell when we want so he has to absorb the imbalance until he can straighten it out. The MM has 3 days to deliver those shares and the correct term for this situation is called "fail to deliver" or short just like if you go to the grocery store and are short enough cash to pay for your groceries. The MM does not short to make money and that is illegal anyhow for an MM to engage in that kind of activity. So the whole premise of your post is based on a prevalent misunderstanding of what this statistic means.
To maintain proper trade volume reporting accuracy, a trade with multiple legs in the trade would only be reported once in the volume reports. The example given would be.
Investor A is long 100 shares and wants to sell. They enter the order through their broker that is routed to a market maker. That market maker will go out and sell the stock into the market before they have bought the stock from you/your broker to close out their account. They do not take possession first as there is no guarantee they can sell the order into the market. By this Notice, the actual sale INTO the market is a short sale because the market maker sold the stock into the market BEFORE they had purchased the stock from you. It is a technicality since they know there position will be closed out minutes later when they go in and buy your shares. To avoid doubling up on trade volume and distorting the picture, only the sale into the market (consolidated tape) is recorded and not the second leg which was the sale transaction between seller and market maker.
So, this is why the short sale volume is high but also why the FTD’s and bi-Monthly short interest reports are not showing any indications of this volume. The short isn’t really a short it is the execution of a long sale by a market maker. The key language in the FINRA notice is this:
Quote: -------------------------------------------------------------------------------- The Daily Short Sale Volume File will provide daily access to the aggregate volume of short sales in NMS Stocks and OTC Equity Securities reported to a consolidated tape and traded over-the-counter during regular trading hours on each trading day. --------------------------------------------------------------------------------
Consolidated tape is the open market where the transaction between seller and market maker is not done at the consolidated tape. That call this the media transaction.
Now for those wondering about Bona-Fide Market Making, I found out it can still be done but not electronically. The 15c-211 applies to electronic trade. Market Makers can continue to execute Bona-Fide Market making through phonic transactions but those sales made would be reported in the short interest reports bi-monthly and if not closed out will be reported as FTD’s in the system like any other trade failure.
Hope this helps at least clear up the high short interest volume reports seen. The reason the number is not 100% is because not all orders are routed thru independent market makers.
Since there is so much discussion and confusion on this I would request this be added as a sticky note since it clears up the confusions here.
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