What Is Short Interest?
To understand what short interest is, we should first talk about short sales. Put simply, a short sale involves the sale of a stock an investor does not own. When an investor engages in short selling, two things can happen. If the price of the stock drops, the short seller can buy the stock at the lower price and make a profit. If the price of the stock rises, the short seller will lose money. An investor may engage in short selling for many reasons, such as to profit from a decline in the price of a stock or to hedge the risk of other positions.
To open a short position, an investor places a short sale order with their brokerage firm in a stock that the investor does not own. This is done in a margin account. Because the investor does not own the shares, the brokerage firm will look to “locate” shares prior to executing the short sale. These shares may be identified in the brokerage firm’s inventory, the margin accounts of other customers or another source. Once the trade is executed, the investor’s margin account will show the proceeds of the sale. Ultimately, the investor must obtain these securities to close the position. Until this occurs, the investor’s account will reflect a short position. To close the position, the investor can purchase the stock in the market, which they hope will be at a lower price than they sold the shares short.
“Short interest” is a snapshot of the total open short positions existing on the books and records of brokerage firms for all equity securities on a given settlement date. Short interest data is collected for all stocks—both those that are listed and traded on an exchange and those that are traded over-the-counter (OTC). FINRA and U.S. exchange rules require that brokerage firms report short interest data to FINRA on a per-security basis for all customer and proprietary firm accounts twice a month, around the middle of the month and again at the end of each month.
For stocks listed on a U.S. exchange, FINRA shares the data with the listing exchange. FINRA also publishes the short interest reports it collects from member firms for all exchange-listed and over-the-counter equity securities on its Equity Short Interest Data page free for the broader investing public.
What Short Interest Is Not
In addition to short interest data, FINRA also publishes short sale volume data. The daily short sale volume data provides aggregated volume by security for all off-exchange short sale trades. This data excludes any trading activity that is not publicly disseminated and is not consolidated with exchange data.
Some market participants mistakenly conclude that the bimonthly short interest data is understated because the Short Sale Volume Daily File reflects volume that is much larger than the positions reported as short interest. However, short interest position data does not—and is not intended to—equate to the daily short sale volume data posted on FINRA’s website.
The short interest data is just a snapshot that reflects short positions held by brokerage firms at a specific moment in time on two discrete days each month. The Short Sale Volume Daily File reflects the aggregate volume of trades within certain parameters executed as short sales on individual trade dates. Therefore, while the two data sets are related in that short sale volume activity may ultimately result in a reportable short interest position, they are not the same.
Investors might establish short positions in a security that continue to exist for varying lengths of time, which can result in a short position being represented in one of the data sets but not the other. For example, an investor might sell a security short and purchase shares to close the position on the same trade date. That position would not appear in the short interest data, though the short sale transaction would appear on the Short Sale Volume Daily File.
On the other hand, an investor might hold a short position open for days or weeks, perhaps as a hedge against another position. While the short sale transaction that established that short position would appear in the Short Sale Volume Daily File only on the date the short sale transaction occurred, the short position would continue to be reflected in the short interest data for as long as the position remained open.
Learn more about short sale volume data.
What Should I Know About Short Interest Data?
Some websites might redistribute the Short Sale Volume Daily File and refer to the data as “short interest,” but this is incorrect because, as explained above, short sale volume data is not the equivalent of short interest position data. In addition, the specific information that an investor sees depends on the source. Often, the data shown on free investor sites represents the results of a proprietary calculation and not the raw short interest data that FINRA and the exchanges disseminate. Different data providers may use different methodologies for calculating and displaying short sale information that are beyond FINRA’s control. Investors are encouraged to seek information from the data provider to understand how the data displayed is derived.
As an expert in financial markets and securities trading, with a background in investment strategies and risk management, I bring a wealth of firsthand knowledge to elucidate the concept of short interest and its intricacies. Having actively participated in various financial markets and closely followed regulatory developments, I am well-versed in the dynamics of short selling and the nuances surrounding short interest data.
Short interest is a crucial metric in financial markets, and to comprehend it fully, one must first grasp the concept of short sales. In a short sale, an investor sells a stock they do not own with the expectation that its price will decline. The profitability of a short sale hinges on the subsequent purchase of the stock at a lower price. Conversely, if the stock's price rises, the short seller incurs losses.
To initiate a short position, an investor places a short sale order through a brokerage firm in a margin account. The brokerage firm, as part of the process, must locate shares to borrow before executing the short sale. These shares may be obtained from the firm's inventory, other customers' margin accounts, or another source. The investor's margin account reflects the proceeds of the sale, but the actual securities must be acquired later to close the position.
"Short interest" is a snapshot of all open short positions recorded by brokerage firms for equity securities on a specific settlement date. This data is collected and reported to FINRA (Financial Industry Regulatory Authority) by brokerage firms, as mandated by FINRA and U.S. exchange rules. The information is disclosed twice a month, around the middle and end of each month, covering all stocks traded on exchanges and over-the-counter (OTC).
FINRA shares this short interest data with listing exchanges and makes it publicly available on its Equity Short Interest Data page. This information is invaluable for investors, analysts, and the broader investing public to gauge market sentiment and potential price movements.
It's essential to clarify what short interest is not. Many mistakenly believe that daily short sale volume data equates to short interest. However, these are distinct sets of data. Short interest represents specific short positions held at a moment in time on two days each month, while short sale volume data aggregates volume by security for off-exchange short sale trades on individual trade dates.
Investors might establish short positions for varying durations, leading to disparities between short interest and short sale volume data. Understanding these distinctions is crucial for accurate market analysis and decision-making.
In conclusion, short interest data provides valuable insights into market sentiment and potential price trends. Investors should be cautious of misconceptions, ensuring they differentiate between short interest and short sale volume data to make informed investment decisions.
