Overview: Short Selling MicroCap Stocks On The OTC Markets
This week, Cromwell Coulson (CEO of OTC Markets Group) shared a post on the OTC Markets Blog about “Understanding Short Sale Activity.”
Short selling is simply the sale of a security that the seller has borrowed. Short selling is a hot topic for microcap investors, traders, and management teams. MicroCap short selling is often credited for volume and price changes with participants citing sources like otcshortreport.com or Short Interest Data from FINRA.
Coulson dives into what this short data really means in his blog post.
What is FINRA Equity Short Interest Data?
According to Coulson, FINRA Short interest data is the most reliable data available. This is the data reported by all broker-dealers to FINRA on a bi-weekly basis. These numbers reflect the total number of shares in the security sold short, i.e. the sum of all firm and customer accounts that have short positions.
This information is available on www.otcmarkets.com on the company quote pages. As an example, OTC Markets Group has a few hundred shares sold short on average, which represents a fraction of their daily trading volume and shares outstanding.
What is Daily Short Volume?
According to Coulson, the Daily Short Volume is the most frequently misinterpreted short data. Daily Short Volume is sometimes referred to as Naked Short Interest. This data shows the percentage of published trade reports (called media transactions in FINRA Rules) that were marked short. This is the types of data found on websites like otcshortreport.com.
So, why is daily short volume misleading?
Coulson writes; “The daily short selling volume is misleading because market makers and principal trading firms report a large number of trades as short sales in positions that they quickly cover. For market makers with a customer order to sell, they will temporarily sell short (which gets published to the tape as a media transaction for public dissemination) and then immediately buy from their customer in a non-media transaction that is not publicly disseminated to avoid double counting share volumes. SEC guidance also mandates that almost all principal trading firms that provide liquidity at multiple price levels, or arbitrage international securities, must mark orders they enter as short, even though those firms might also have strategies that tend to flatten by end of day. Since the trade reporting process for market makers and principal trades makes the Daily Short Volume easily misleading, we do not display it on http://www.otcmarkets.com.”
Learn more HERE.