Most market makers have one job and one job only – to make the market for buy and sell orders. Given that they are at the center of everything, they see more than regular investors do. They also generally have a good grasp of how strong supply and demand is, and the good market makers are also familiar with a stock’s fundamentals and technical data.
Due to market maker’s superior knowledge, understanding what market makers think is rather important. Although market makers aren’t required like big hedge fund managers to report 13F data every quarter, the latest short volume data reported to FINRA can sometimes show what the market makers are thinking. Most of the short volume percent reported to FINRA is due to market makers deciding to short temporarily seconds, minutes, or hours before covering.
Due to the fact that market makers cover many of their positions seconds later, much of the short volume isn’t necessarily an indication of useful bearishness. The fact that a market maker is willing to sell and cover seconds later doesn’t do an investor holding the stock for the long term any good. The market maker could be bullish on the stock long term, and still be willing to short temporarily to satisfy a client request. Similarly, market makers often have to go short in a fast market in order to fulfill their job of providing liquidity.
That being said, during some times, the fact that market makers are willing to short more than normal indicates perhaps that they are perhaps more bearish. At other times, if market makers are willing to short less, it indicates that they are perhaps more bullish. If short percent goes to one extreme or another, or if it changes rapidly, it is a sign for investors to pay attention to fundamental and technical factors related to the stock.
Volumebot is an easy way to keep track on market maker activity. As with all things, it is important to use the indicator and the data long with fundamentals and technicals.