Tagged: Short Volume

Volume and Interest

In the five trading days ended Oct 17, 49.1% of average daily stock volume was short.

“Wait, what?” you say.  “Half the stock market is short?”

Yes, that’s right.  Short volume last topped 49% marketwide in mid-April. The market glided gently downward from there to May options-expirations. Speaking of expirations, we’re in them for October this week, so it’s a good time to talk about shorting.

Short volume hit a last marketwide low July 12 at 43%, which roughly corresponded to the high point of the Brexit Bounce.  At Nov 30 last year short volume was 42.9% and December and January were horrific for markets.  And on Jan 7, 2016, short volume was 52%. A month later the market bottomed and soared till April.

If short-volume history is a guide, the market is nearing a temporary bottom. It’s unwise to use a single data point, and we don’t (we use six key measures, plus a small supporting cast, as you clients know). The flow and behavior of money count, and we track both.

“Back up,” you say.  “You lost me at ‘short volume.’ What do you mean by that?”

Short volume is trading derived from borrowed shares.

“I read back in August on Zero Hedge that nobody’s short stocks. Trading from borrowed shares is 2% of the S&P 500, near a three-year low.”

You’re talking about short interest, the long-in-the-tooth risk-assessment tool derived from a 1975 Federal Reserve rule called Regulation T. Shorting and derivatives exploded after the US scrapped the gold standard and the Feds wanted to track margin accounts.

“Are we talking about the same short interest? The amount of total shares outstanding or float that’s borrowed and sold and not yet covered?”

Yes. Forty-one years later it’s still a standard market-risk measure. Yet it’s largely useless predictively. It didn’t shoot up until well after Bear Stearns foundered. In late 2007 it was 1.6%.

“So you’re saying it’s a crappy measure. What’s short volume then?”

Short volume is the amount of daily trading volume that’s borrowed. If a stock trades a million shares a day and short volume is 53%, then 530,000 shares of it were borrowed.  With over 40% of all market volume coming from Fast Traders wanting to own nothing, a great deal of this is short-term trading.

“Okay, I’m following. But what’s it tell me?”

Short volume signals several things but in sum it’s what you think: High short volume, lower price.  Why? Shorting is at root the continual adding of supply to the market. So if demand doesn’t keep up, price falls.

Here’s more:

High short volume means weak expectation for gains. No matter what company fundamentals are, if more volume comes from borrowed shares than owned shares, Fast Traders weighing tick data with high performance machines predict investors would rather lend shares for a return than spend money buying and holding them.

High short volume points to rotation. If the machines want to be short, they’re betting holders are selling and trying to hide it by passing shares through multiple brokers. The converse is true too: If you’ve been short and shorting falls, rotation is probably done.

Persistent high shorting reflects uncertainty about corporate strategy.  Not to pick on Tesla (because it’s not alone by any stretch) but its 200-day average short volume is 55%. Investors say it’s a trading vehicle, not an investment opportunity.  By contrast Qualcomm’s 200-day average is 42%. The two have inverse performance the past year.

Tangentially, high short volume CAN mean ETFs are seeing outflows. Exchange Traded Funds don’t directly buy or sell stocks but they create big volume because ETFs track other measures, such as indexes, that are in turn composed of other issues, such as stocks.

Traders measure deviation between ETFs and these other things and arbitrage (profit on price-differences) the spreads.  When investors sell ETF shares, ETF market makers or authorized participants (parties designated to create and redeem ETF shares) might short components to raise cash in order to buy ETF shares and retire them to rebalance supply.

In sum, short volume is a sensor situated near the beating heart of the money behind price and volume. And while algorithms driving trades today are designed to deceive, they can often be unmasked through short volume (with a couple other key measures).

For the rest of this week though, don’t be surprised if the market shows us not a beating heart but expirations-related palpitations.

Feedback

You’ve got to know what to measure.

Every time I interact with anybody from an airline to my company’s communications providers, I get a survey. “How’d we do?”

It drives me crazy. It’s like Claymation customer service:  Move something, take a picture.  Move something, take a picture. You’ve seen clay animation?  Wallace & Gromit popularized cartoonish clay caricature (and cheese!). Each picture contributed to forming movement and emotion. Every snapshot is feedback that when viewed together become the story. It works in cartoons but isn’t a good customer-service model.

We’re inundated with market information in the investor-relations profession.  The feedback loop is so intensive that it can somewhere morph from meaningful to white noise. You don’t know what you’re measuring or hearing. The sequence of snapshots doesn’t translate to meaningful film. There’s no narrative in the data.

Back when I was in the IR chair, I’d hear all the time that we’d broken through moving averages.  Initially, I exclaimed, “Oh!” and added, “Thank you!” It was only later that I realized moving averages told me little and certainly weren’t entertaining like Claymation. What should I tell management?  “Unfortunately, there’s been a breakdown in our moving averages, prompting a sharp shift in perception.”

Really?

Here’s another metric that confuses busy with productive. We have clients with high short interest. The measure derives from a 1974 regulation from The Federal Reserve to track borrowing in marginable securities accounts as part of aggregate money supply.

Borrowing is a good measure of risk. To that end, if you’re interested in a riotous three-minute explanation of what’s wrong in Europe, click here (it’s a video clip so be appropriately prepared).

But what if we’re not measuring borrowing correctly? Short volume, or trading with borrowed shares instead of owned shares, is roughly 43% of the total market. This measure wasn’t created by the Fed in 1974. It’s current. It’s Claymation. We’ve studied short interest and short volume and found that the former often is inversely correlated with price-movements, suggesting that it’s a lagging indicator of risk (and thus a lousy one). Not so with short volume.

The ownership measure extant today, 13Fs, was created in 1974 as well. It’s deplorable as feedback on institutional behavior, coming 90 trading days after it might have occurred. Today, over $1.7 trillion of assets are held by Exchange-Traded Funds that post ownership positions daily, yet trades clear “T+3,” or potentially four days out.

Do you think about these things in the IR chair? Perception is, “Our price continuously reflects rational thought.” Reality is something else, demonstrably and statistically.  Speaking of which, I’m hoping to take the NIRI Arizona chapter on a rollicking safari through market structure today. Process is more influential than purpose.

What you don’t want to do with your IR forensics is confuse busy with productive. You can track vast seas of data that neither offer narrative nor animate it.  What’s the right feedback mechanism? Reality! What is money doing right now and what’s the likely impact in the future, and what’s that mean to actions in my IR program and what I communicate to management? (more…)

Autocallable

It’s time we had The Talk.

Candid discussions can be uncomfortable. They broach subjects we prefer to avoid. But we can’t ignore the facts of life.

One such fact is Contingent Absolute Return Autocallable Optimization Securities. We’re more comfortable talking about diarrhea, right? Bring them up at a party and the crowd disperses. Try talking to your teenager about them and she’ll roll her eyes and turn up One Direction in her ear buds.

Why the public disdain? Look at the name. Need we say more? They’re wildly popular though with issuing banks including JP Morgan, UBS, Barclays, Morgan Stanley, RBC and others – just about anyone who offers “structured products.”

This particular version of structured product (“a financial instrument crafted by a brokerage to achieve a particular investment objective for clients ranging from short-term yield to long-term risk-mitigation” is how we’d describe them) achieved both infamy and scrutiny after Apple shares slumped in latter 2012. Big banks had sold hundreds of millions of dollars of Contingent Autocallable Securities paying a yield of about 10% and tied to the performance of Apple shares. Buyers got stuck with shares that had dropped 30% in value and lost principal to boot.

I’ll give you my simplest understanding of how these instruments work and why you should care from the IR chair. It’s a debt instrument and it’s unsecured. It tends to pay high interest, like 10% annualized in a basis-points world. Whether it pays out turns on two things: How long you hold it, and whether the underlying equity to which it’s paired declines below a trigger price.

There are two problems for IROs. First, because regulators consider it debt, if it “converts” there’s no equity trade. These things are not responsible for big percentages of volume so there’s no vortex looming in your share-counts. But still, decisions and strategies impacting shares are resulting from instruments you can’t track. (more…)

Rotation

You’ve heard of 99-year leases?

Karen’s grandfather has had an exceptional lease on life. We were in Nashville last weekend as he marked the calendar a 99th time. Remarkably, in his lifetime headlines have been made by WWI, inventor Nikola Tesla, the Great Depression (he was a divinity student at Yale then) and Adolph Hitler.

Speaking of a lease, in a sense that’s what short volume is. We’re not talking about short interest, periodic reads on short positions outstanding. That metric today struggles for statistical significance. Short volumes marketwide the past 20 days averaged 44%. In our client base, the highest daily average was 63%, the lowest, 28%.

Recently, a noted client received public attention from a prolific Short (an investor who in the old-fashioned way borrows and sells shares to raise cash on a belief exposure can be covered later at a lower cost for an arbitrage profit between selling and buying). In weeks leading up, our client’s volume marked short instead of long (a trade is one of those two, or exempt from the rules, the latter true for less than 1% of all trades so 99% of volume is long or short) rose from 39.9% short daily to 71.9% the day before the news.

It’s hard to fathom so large a portion of daily volume short – leased, or borrowed. Yet consider other assets. Most Americans borrow to buy cars and houses and major appliances. We borrow to buy dinner by paying with credit when we eat out. Banks borrow to make loans today (not generally true before the Fed). Governments borrow for everything. In buying $3 trillion of Treasury bonds and mortgage-backed securities, the Federal Reserve borrowed from Americans’ future earnings and productivity. Borrowing is rampant (and no harbinger of health, but that’s another story).

Stocks are the same save that the ratio still favors owning over renting (at 44% to 56% the divide is no chasm). Tracking borrowing alone tells one little except that your stock’s health is dependent on or derived from borrowing. (more…)

Binary IR

There’s a joke software engineers tell. There are 10 kinds of people in the world. Those who can count in binary and those who can’t.

Nerd jokes (no offense, technology friends!) are often neither immediately nor apparently funny. But the point is binary understanding, a sort of either/or perspective.

Suppose you were planning a vacation. After much research, you decide like Tiger Woods that you’re going to Cayo Espanto, off Belize. You reserve its luxurious accommodations, arrange for transit from the mainland, plan for time out of the office, purchase clothing and other supplies, even get your scuba certification so you can plumb the depths of the Great Blue Hole off Lighthouse Reef while there. Last, as an afterthought, you look for airline tickets.

And there are none.

If you’re Tiger Woods, you don’t need no stinking airline tickets (grammatically impaired colloquialisms are never accidental here). All analogies break down somewhere. But you get the point, right. Reserving rooms and laying plans before determining if the trip is possible is getting the horse and cart confused. And there is requisite order to the effective horse-and-cart combination.

Which brings us to investor relations and market structure. IR has always considered its objective to be singular. In geopolitical parlance, Message enjoys regional hegemony. There are no other considerations. (more…)

Great Expectations

Happy New Year! Hope you spent the two-week break from these pages joyfully.

We’ve descended this week from the high Denver backbone of the continent to visit west in Santa Monica and sponsor NIRI’s Fundamentals of IR program. Following our New York trip before Christmas, we’ve marked the turn of the calendar by touching both coasts.

We’ll kick off the year with a story. I’ve just finished Charles Dickens’s Great Expectations on my Kindle. Yes, I realize it was first published in serial form in 1860 (the year the cattle ranch on which I grew up was homesteaded). I have a long reading list. It took me awhile to get around to it.

Lest I spoil excitement for the other three or four of you planning on it still, I’ll say simply that it’s a masterful narrative assemblage of plot points, the connections between which one would never fathom at the outset. Great storytelling never gets old.

The market is like that too. As you begin 2014 in the IR chair, remember that in a market dominated by algorithms – the principal purpose of which is to deceive – things are rarely as they seem.

Take trading from Dec 9-31, 2013. The US equity world it seemed was gathered in knots and pockets like people in an old west town where the gunslinger was expected anytime to ride through. Tones were hushed, gestures animated. A pregnant air of expectation hung like a storm.

Would the Fed finally taper? And if it did, what then?  (more…)

The Short Fed Story

Is the Federal Reserve fueling stock-market gains?

When St. Louis Fed president James Bullard addressed the Bowling Green, KY, Chamber of Commerce in February 2011, he pinpointed correlation between Ben Bernanke’s September 2010 Jackson Hole speech on “QE2,” the Fed’s second easy-money program, and the stock-market rebound that followed. Classical effects of monetary easing include rising equity prices, Mr. Bullard said.

The Fed wanted market appreciation because people feel better when the stuff they own seems more valuable. But I think we’re having the wrong debate. The question isn’t if Fed intervention increases stock prices, but this: Can prices set by middle men last?

Before actor Daniel Craig became the new James Bond he starred in a caper flick called Layer Cake that posited a rubric: The art of the deal is being a good middle man. The Fed is the ultimate global middle man. Since the dollar is the world’s reserve currency, the Fed as night manager of the cost and availability of dollars can affect everybody’s money. After all, save where barter still prevails, doing business involves money. Variability in its value is the fulcrum for the great planetary teeter-totter of commerce. The risk for the Fed is distorting global values with borrowing and intermediation.

In the stock market, we’re told it’s been a terrible year for “the shorts” – speculators who borrow shares and sell them on hopes of covering at a lower future price. The common measure is short interest, a twice-monthly metric denoting stocks borrowed, sold, and not yet covered. Historically, that’s about 5% of shares comprising the S&P 500. (more…)

The Long and Short

In the timeless 1987 movie The Princess Bride, Vizzini the Sicilian, played riotously with a lisp by Wallace Shawn, keeps declaring things “inconceivable!”

Swordsman Inigo Montoya, portrayed then by Homeland’s Mandy Patinkin, finally says, “You keep using that word. I do not think it means what you think it means.”

You could say the same for short interest. It’s not what you think it means. Stay with me to the end, and you’ll see.

On August 2, 2012, Knight Capital Group’s algorithms failed. Monday at TABB Forum, Anthony Masso, CEO at trading risk-analytics provider Succession Systems, described how the SEC’s recent settlement with Knight successor KCG Holdings clarified a risk standard called the Market Access Rule. It requires brokers to have systems that forestall actions that may imperil themselves or others in the market. I’d paraphrase the law this way: “We order you to take whatever actions are necessary to prevent bad stuff. Thank you.”

That’s not what got my attention. The settlement reveals details about Knight’s errant trades. The broker bought, or went long, $3.5 billion of stocks; and shorted, or sold, about $3.2 billion. In less than an hour, its systems executed four million trades in 174 different stocks to create these positions.

This one tidbit is a tumbler unlocking vast secrets about market behavior. Knight’s algorithms were observably designed to build long and short positions of similar size principally to supply the storefronts of the stock market. When these positions failed to modulate, markets rushed into the vacuum, crushing Knight’s balance sheet.

Here’s the delicate balance in proprietary high-speed trading. Get it wrong by less than 10% and you’re done. Knight got it wrong. This same fragile trestle trains markets over the chasm each day. We’re all riding the rail.

ModernIR tracks short volume using algorithms. The daily average the past 50 days marketwide is 41%, not far off long/short equilibrium. Combined volumes on exchanges and dark pools total about 6.3 billion shares daily, meaning 2.5 billion shares each day are short.

Short interest in the S&P 500 is nearer 5% on average, though components can reach levels that roughly match daily short volume. The difference between interest and volume is that volume is just borrowed, while interest remains sold and outstanding.

Our data show that 11% of public companies have short volume above 50% of total volume. The highest in our client base the last five days was 61%. We’ve seen levels reach 85%, meaning nearly nine of every ten trades involved short shares – rented trading inventory. The lowest we saw was in a series of Class B shares trading just a few thousand per day where still 15% were short.

Elevated short interest can mean speculators are betting on a downturn. But it could as well be searing daytime demand for trading “inventory” – bowling shoes to put on for the day, for the game, traders and intermediaries finding renting cheaper than owning.

What concerns me is that short volume by definition in Regulation T is credit. So the market is heavily dependent on borrowing, just like the entire global financial system.

You have to see volume differently. Half of it is borrowed. Rented. Bowling shoes. High short interest is a product of frenetic demand on short horizons – not a certificate guaranteeing imminent pressure.

But realize that a hiccup in long/short balances can move your shares sharply – and it’s got nothing to do with ownership, or even shorting in the conventional sense. Inconceivable? No. And you know now what I mean.

Stopping Shorts

We’re in Paris.

After last week’s pelting Hollywood, FL schedule at NIRI National 2013, we’re sight-seeing along the Seine and then wheels-down southward through Provence on bikes. Tell you about it in two weeks.

Back to NIRI. The Westin Diplomat taunts with beckoning views of surf and sand mere yards away while you ride chilly escalators through its immense conference center. One early walk Wednesday up the strand, home to bargain venues like the Manta Ray Hotel and dining establishments where breakfast still goes for $3.90, cured our longing for the outdoors, however. We soaked fast in the sultry air where but degrees of atomization separate sea and sky. We don’t know humid in Denver.

Observations? NIRI ran a solid show, tightening panel-times and offering innovative material to spice up the same stuff you’ve always seen if you’ve gone to fifteen of these like I have. Audience? Seemed light to me, perhaps some under the 1,200-ish we heard. But it’s FL. Maybe a chunk hit boats and links rather than booths and panels.

ModernIR pumped up its presence with a new booth, a bag insert, and a full page in the conference program. And I was on a panel about short-selling (we track short volume with algorithms). In all my NIRI years, I can’t recall one on shorting that featured the head of securities-lending for Franklin Templeton and a real short-selling hedge fund.

The gregarious Kevin Tuttle, CEO of short fund Tesseract Management, entertained us with wide-ranging views interspersed with gems that could slip by if you weren’t paying close attention. (more…)

Equity Supply Chain

Dollar General (NYSE:DG) dropped 9% yesterday, offering a lesson to investor-relations professionals.

Before that, a plug: At NIRI National next week I’m paneling with the CEO of short-seller Tesseract Management and the head of securities-lending for Franklin Templeton on short-selling strategy and practices. Longtime NIRI fixture Theresa Molloy has organized a great discussion and will moderate. And please visit ModernIR at booth 719, our eighth straight year in the exhibit hall.

For Dollar General, revenues were light and guidance lighter, margins weakened due to the products folks were buying last quarter, and inventories rose 21%. Investors and traders can examine facts about the structure of Dollar General’s market, from margins to supply-chain, and make value judgments (which will be distorted by other market behaviors, however).

Have you considered that your equity market is also affected by logistics, supply-chain and who’s consuming the product? We perhaps never imagine that the stock market has the same characteristics and limitations of other markets. Have you gone to the shoe store and they didn’t have your size in the brand you wanted? How come that doesn’t happen in the stock market? (more…)