Why Short Volume is Important

Daily short volume, as reported by FINRA, is very misunderstood. Most people think daily short volume is just that — the volume that bearish investors put on to add to their short positions. A short glance at the change for total short positions reported bimonthly to the NASDAQ debunks that belief. Short volume isn’t the same as short interest.

In truth, much of the short volume is due to market makers selling into the market a few fractions of a second/minute/hour before they close their position by executing a broker order. 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, many market makers often have to go short in a fast market in order to fulfill their job of providing liquidity. Other market makers will widen their bid ask prices enough to get out of that scenario.

Nevertheless, short volume data is important — market makers are some of the most informed investors out there and they know the supply and demand equation of a stock better than almost everyone. Some do trade for their personal accounts and their shorting shows up in the short volume. Like other technical indicators, if enough people believe in something, that something can happen. It is also true that when factoring in the trend and potential randomness, a market maker could be potentially bearish if the short percent is substantially higher than average. The market maker could be potentially bullish if the short percent is lower than average.

To balance the two opposing factors and to prevent market makers from gaming the short data, an investor should use the site in the following: If short percent changes rapidly from day to day, or if short percent goes to one extreme (a monthly high or monthly low), it is a sign to pay attention to the fundamentals and technical of a stock more.

Volumebot helps ordinary investors gauge market maker sentiment by displaying daily short volume as reported by FINRA. We aggregate all of the the short volume data and total volume data (but not short exempt volume due to its small size) reported by FINRA from ADF, FINRA; NASDAQ TRF, FINRA NYSE TRF; and ORF and display it in a simple chart and table format. Please note that due to the fact that not all volume is reported to FINRA, our total volumes will often be considerably smaller than the volumes listed on Yahoo or Google Finance.

Our proprietary market maker indicator has three settings, ‘Somewhat bearish — Pay More Attention to Technicals and Fundamentals’ , ‘Neutral’, and ‘Somewhat bullish- Pay More Attention to Technicals and Fundamentals’. It weighs historical short volume data for the stock from data reported from FINRA. The indicator should not be used alone and is best used in combination with other fundamental and technical factors. We should mention that shorting is very dangerous and should not be done by most investors.

As with other indicators, short percent does not work by itself, but it does help investors make more informed decisions.

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