Here are some detailed explanations from a respected old-timer, TOB. Some of us longs know what kind of poster he was.
Hopefully this post gives a better understanding of what the short volume really means.
Quote:As has been repeatedly clarified here, that FINRA report does NOT indicate short sales. It is widely misused to make that claim. Actual short interest in CTIX is so small as to be almost insignificant.
Below is a partial clarification:
"You can find everything concerning SEC Rules 200-203 here:
http://www.sec.gov/rules/final/34-50103.htm
So lets get to the meat of it, I will provide a couple of examples of trades that require being marked short. I will use generic trading symbol XXXX for these examples:
So lets get to the meat of it, I will provide a couple of examples of trades that require being marked short. I will use generic trading symbol XXXX for these examples:
Typical everyday trade, I have 20,000 shares of XXXX for sale on the Ask, you however want to purchase 10,000 of the shares at my price. So you enter your order and it is sent to your broker to execute. First thing is a broker electronically checks to see if there are current sell orders that match your request, if not it is off to the ECN. As I stated earlier each broker has an MM working for them to execute trades, the MM for your broker sees your order and knows I have 20,000 shares for trade. Here is where MMs “create” liquidity and order flow, the ECN matches perfect blocks like trade for trade, size and price are automatic initiated trades. In this case you only want 10,000 shares, so immediately the MM sells your broker 10,000 shares short and marks the trade as “short” although you are long in the trade, this gets reported to the Daily Reg SHO report and also on the consolidated tape.
Now nearly simultaneously on a separate leg of the very same trade transaction the MM is buying the cover from my 20,000 share block, and purchases 10,000 shares from me. This gets reported in the Non Tape Transactions Report and both Non tape and consolidated tape are both sent to FINRA for balancing and reconciliation.
The Daily Reg SHO only reports how the trade was initially executed and it does not reconcile based upon the fact the trade was covered as that will be taken care of in another report. Regulators only want to know exactly how the trade was initially executed and that is it. The trade goes off to the DTC and NSCC for clearing and settlement since it is a CNS security and is cleared and settled. According to SEC reports 98% of all trades are cleared and settled within the same day of trade or T+0. Of course regulators give T+3 for settlement, that is trade day plus 3 days for settlement, once it exceeds that it becomes an FTD (Fails to Deliver).
There is another type of trade that causes a “marked” short designation and that is an internalized order. This is caused by someone using a “market order” rather than a limit order. When such an order is placed an MM gets to make money on the spread here, and typically what happens causes some L2 watchers to cry. It is imperative that people use limit orders for this reason because market orders can really create money for MMs on huge spreads. The MM has an order to buy shares at the best Ask, it also sees the market order, it immediately sells shares to the Ask short and buys the market order at bid to cover. This often causes shock on both sides as somebody that was best Bid and Ask did not get filled on either order.
This is the only time MMs make money on the spread here in the OTC, otherwise it is all additional fees charged by your broker to pay for the transactions.
This is what short sales are, they are not actual short positions and they are not Abusive Naked Short Sales, they are simply trades marked short for temporary moment in time. Unfortunately the information is often touted and manipulated to make stupid conclusions of shorting against a security. In fact websites have sprung up providing this information as some type of trading knowledge to be used in making trade decisions. Unfortunately it is all fodder and is of no use to anyone other then regulators to track settlement of trades from initial execution to final settlement. I have seen it all including adding everyday totals to come up with fantastic claims that “OH MY GAWD 320% of the float has been shorted on XXXX!!!!!!!!!!!!!”
Hopefully this post gives a better understanding of what the short volume really means.
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