Short Interest

Nicole Wachs from TradeKing

For a crash course, short selling is when a trader borrows shares from his/her broker and sells them on the market without ever owning the stock. The investor or trader’s aim is to replace the shares for less cost than the price at which they were borrowed and make a profit. If the price increases, however, you’ll be exposed to potentially unlimited losses, so please approach short selling with caution. 

Found an interesting link today. It shows the largest short interest on the NYSE.
The first thing that caught my eye was that the first 4 entry were Preferred Shares. I didn't know you could short preferred stocks. I'll have to check that out.

Rank	Company Name	Symbol	% Short Interest	Short Interest
1	First Industrial Realty Trust Inc. Dep Pfd. (Rep. 1/10,000 of a share of 7.25% Cum. Redeem. Pfd. Series J)	FR.PJ	2947.33%	17,684
2	First Industrial Realty Trust Inc. Dep Shs (Rep 1/10,000 of a share of 7.25% Cum Redeem Pfd Series K)	FR.PK	2689.5%	5,379
3	Apache Corp. Dep Shs (Rep 1/20th Interest in a share of 6.00% Mand. Conv. Pfd. Ser D)	APA.PD	92.46%	1,169,611
4	Hartford Financial Services Group Inc. Dep Shs (Rep 7.25% Mandatory Conv Pfd Ser F)	HIG.PA	72.92%	419,264

TheStreet.com has put it this way:

The short interest in a stock, a widely available statistic, represents the total number of shares that have been sold short and not yet repurchased. This raw number won't tell you much on its own. Instead, you need to look at short interest as a percentage of the stock's float, or the number of shares that are actively tradable in the market. This statistic will let you compare one stock's short interest with that of others.

I was trying to investigate what would be considered an excessive short interest percentage. Wow! I think the rule of thumb is if its more than 10% short interest then it is considered  to have a large contingency of short sellers.

It got me thinking, though. If you had two stocks with a 10% short interest. [ 5M / 50M = 10% short interest ]  Isn't "days to cover" a more accurate measure of  bearish sentiment?

If  you had two identical equities with 10% short interest. The first stock with 50M float and an average volume of  1M / day,  5M in short interest, therefore 5 days to cover. The second stock with 50M float and an average volume of 250K / day,  5M in short interest, therefore 20 days to cover. A higher number would indicate it would be harder to unwind your position.

"Investopedia indicates a bullish guideline for the short interest ratio is eight days. Wikipedia’s bullish rule of thumb is lower, about five days; A number around three is noted as bearish"

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[Edit:]
 Could it be possible to have a stock that is under the 10% short interest and yet have a larger "days to cover" number than one high on the short interest list?

Using the FINVIZ screener and sorting by short ratio, with stock that have 300K AverageVolume, the stocks with "days to cover" larger than 10 compromise 10% of the listings.

One refinement to the screen would be to use $Volume [price * volume] to assure that no manipulation is occurring. This will give you a rough average number of trades generating the volume listed. If its 10 trades a day, you know that someone could possibly  be pumping the stock. My rule of thumb on $Volume is >6M, but your risk level could allow for a lower combination. That would allow for the following:

• $1 stock with 6M average volume
• $10.00 stock with 600K average volume
• $100.00 stock with 60K average volume

Or just adjust the price to your comfort level, i.e. stocks > $5.00.

Found a website which combines the two metrics -

"Finally, I like to combine both days-to-cover and percentage-short in one metric, where the product of the two gives us a number that "combines" both metrics equally. That is, the higher the number the highest the combination of both metrics together where both are equally important."

%Short * Days to Cover > ?
What would be the rule of thumb inflection point?

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A  short squeeze occurs when a stock that has been shorted by many investors rises. More and more short-sellers start buying shares to cover their positions, driving up the stock price.

I Just Want To Know Whether I'm the Sucker

I didn't want to type in that whole post again.....(Thanks Blogger.com for crashing & losing my data) So here are the links that are important.

In a poker game, if after 30 minutes you don’t know who the sucker is, then it’s probably you. What started this line of thinking is Bridgepoint Education, Inc. (BPI) and their high short sale interest.

Naked selling is the illegal practice of short selling shares that you do not own. Ordinarily, traders must borrow a stock, or determine that it can be borrowed, before they sell it short. But due to various loopholes in the rules and discrepancies between paper and electronic trading systems, naked shorting continues to happen.

While no exact system of measurement exists, most point to the level of trades that fail to deliver from the seller to the buyer within the mandatory three-day stock settlement period as evidence of naked shorting. Naked shorts may represent a major portion of these failed trades.

From www.deepcapture.com:

But while the SEC is of no help, most any Wall Street broker can describe several “proprietary” strategies that are popular with unscrupulous hedge funds. One such strategy is known as a “married put.” Normally, a hedge fund buys from a market maker a certain number of put options—the right to sell a stock at a specified price at a specified date. If on that date the stock has lost value to the point it is below that specified price, the buyer of the put option (the hedge fund) makes money, and the seller (the market maker) loses money. To hedge the risk that he might lose money, the market maker, at the same moment that he sells the put option,  also short sells the stock. This is perfectly legal. But some market markers conspire with hedge funds to drive the stock price down. Instead of merely shorting the shares into the market, the market maker naked short sells the shares, and, importantly, sells those phantom shares to the same hedge fund that bought the puts. As a result, the hedge fund manager winds up with the puts and a matching number of shares (actually phantom shares that are never delivered to him, but about which he never complains, or forces delivery, as that would create upward pressure on the stock, the precise opposite of what he wants).  Because the puts and the phantom shares are equal in number and arrive together at the hedge fund, they are known as “married puts”. Once in possession of the phantom shares, the hedge fund manager proceeds to fire them into the marketplace. But he is able to say that he never naked shorted because all he has done is sold the shares that he bought (wink wink) from the market maker. Either way, the effect is to flood the marketplace with phantom stock. The hedge fund makes money. And the market maker is rewarded with more business selling married puts. In the slang of Wall Street, these married puts are known as “bullets.” Through their maneuverings, the option market maker and hedge fund manager synthesize a naked short position that puts “bullets” into the hands of the hedge fund. The hedge fund fires those “bullets” at the stock to make it collapse, timing the last “bullet” to fire as the hedge fund’s put option expires profitably. If the option position nears expiration and looks like it will expire at a loss (“out of the money”), the hedge fund manager goes back to the option market maker, and together they reload by creating more "bullets"

How does the SEC find naked shorts?
The www.deepcapture.com article continues:

Incidentally, the fee charged for such puts do not follow any normal option model pricing (in fact, the exchanges search for married puts by looking for options that are mispriced in relation to Black-Scholes, the standard formula that prices options). That is because their pricing is not really a function of any math or statistics, but is a function of the willingness of the hedge fund to pay the option market maker to help him break the rules against naked short selling. And that willingness is a function of how difficult it is for the hedge fund to use other loopholes to break those rules.

How do I find naked shorts?
There are several good short sale sites.

• www.buyins.net
• http://www.shortsqueeze.com/
• http://www.highshortinterest.com/

Where Can I Find Threshold Lists data?
A “threshold security” is any equity security where, for five consecutive settlement days:

• There are aggregate fails to deliver at a registered clearing agency of 10,000 shares or more per security;
• The level of fails is equal to at least one-half of one percent of the issuer’s total shares outstanding; and
• The security is included on a list published by a self-regulatory organization (SRO).

There is a 13 day grace period before a transaction is put on the threshold list.

Each SRO is responsible for providing the threshold securities list for those securities for which the SRO is the primary market. You can obtain SRO threshold lists at the following websites:

Nasdaq: http://www.nasdaqtrader.com/aspx/regsho.aspx (includes Nasdaq issues, OTCBB, and other OTC issues) 

NYSE: http://www.nyse.com/Frameset.html?displayPage=/threshold/ 

AMEX: http://www.amex.com/amextrader/tradingData/RegSHO/TrDa_RegSHO.jsp (Amex listed securities only) 

CSE: http://www.chx.com/publications/reg_sho.htm 

The Boston Stock Exchange, Philadelphia Stock Exchange and National Stock Exchange are not the primary listing exchange for any securities at this time and, therefore, are currently not publishing threshold securities lists.

Bottom line to BPI? 
Since writing this post initially, the short interest on BPI has gone from 56.14% to 81.40% according to Yahoo.finance.com; However, there seems to be no listing of it on the threshold lists.

It appears, even though this is a controversial sector, that there is no naked short manipulation going on. This equity could play out either way, but the market and regulators will decide its fate, not the manipulators.


Related articles:
-This behavior is consistent with the illegal “reset” transaction described in the enforcement case brought by the SEC against naked short seller Steven M. Hazan

-A way around the "uptick rule"