Short Interest

Short interest is the quantity of a security that has been sold short and remains open, meaning the sellers have not yet bought the shares back to return them to the lender. It is a snapshot of the outstanding bets against a share at a point in time. The figure is reported as a number of shares and is commonly converted into a percentage of the company's freely traded shares, known as the float.

Short interest arises from short selling, in which a trader borrows shares, sells them and hopes to repurchase them later at a lower price. Investors watch the figure as a gauge of negative opinion about a company and as a warning of a possible short squeeze. It should not be confused with open interest, which counts outstanding derivative contracts.

In the United States, brokerage firms report the short positions held in customer and proprietary accounts to the Financial Industry Regulatory Authority twice a month, as of settlement dates around the middle and the end of the month. The totals are published per security some days later. The data therefore arrive with a lag and show positions only on the reporting dates.

In the European Union, the Short Selling Regulation of 2012 takes a different approach. Individual holders must notify the national regulator when their net short position in a company reaches 0.1 percent of its issued share capital, and positions of 0.5 percent or more are disclosed publicly with the holder's name. Other markets, including Japan, Hong Kong and Australia, operate their own reporting regimes. Commercial data vendors supplement official figures with daily estimates derived from the securities lending market, including the quantity of shares on loan and the fee charged to borrow them.

Two ratios put the raw number in context. Short interest as a percentage of float is:

Days to cover compares the position with normal trading activity:

• $\text{Shares sold short}$ is the reported short interest.
• $\text{Float}$ is the number of shares available for public trading, excluding closely held stakes.
• $\text{Average daily trading volume}$ is the mean number of shares traded per day over a recent period.

Suppose a company has 12 million shares sold short, a float of 80 million shares and an average daily trading volume of 3 million shares. Short interest is $12 / 80 \times 100 = 15$ percent of float, and days to cover is $12 / 3 = 4$. It would take four days of typical volume for every short seller to buy back, if they were the only buyers.

High short interest indicates that a substantial amount of capital is positioned for a fall in price. Short sellers bear borrowing costs and unlimited potential loss, so they tend to be well-informed, and academic studies have generally found that heavily shorted shares go on to earn lower returns than lightly shorted ones. On this reading, high short interest is a bearish signal.

The opposite reading treats short interest as latent demand, because every short position must eventually be closed by buying. If the price rises sharply, losses and margin calls can force short sellers to buy at once, driving the price higher still. Two well-known cases are Volkswagen in October 2008, whose ordinary shares briefly made it the most valuable listed company in the world, and GameStop in January 2021, where reported short interest exceeded the entire float. A high days-to-cover figure suggests that an exit would be crowded.

Changes in short interest are often more informative than the level, and the figure is used alongside other inputs in sentiment analysis of the market.

• Not all shorts are bearish bets. A market maker may be short as a result of supplying liquidity, and many funds short a share for hedging, for example against a convertible bond issued by the same company or as one side of pairs trading.
• Other routes are not counted. A negative view can be expressed by buying a put option or through swaps, which do not appear in short interest directly.
• The data are delayed. Official figures can be two weeks old or more when published, and positions may have changed.
• The float is an estimate. Different providers define it differently, so percentage figures vary between sources.
• Funds and indices behave differently. Short interest in an exchange-traded fund often reflects hedging of other positions, not a view on the fund.

Regulators generally accept short selling as a contributor to price discovery and liquidity, while restricting abuses. In the United States the Securities and Exchange Commission requires a seller to locate shares to borrow before selling short and sets deadlines for closing out failed deliveries, rules aimed at so-called naked short selling. Several regulators imposed temporary bans on short selling of financial shares during the 2008 financial crisis and of wider lists of shares in some European markets in March 2020.

• Financial Industry Regulatory Authority (FINRA)
• European Securities and Markets Authority