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How Trading Volume Can Lower the Short Interest Ratio

Article Quant Q&A · Author: phdstudent
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Summary

The document explains how a stock’s short interest ratio can fall even when the number of shares sold short rises. The ratio is interpreted as short interest divided by average daily trading volume over a recent period. Therefore, the ratio can decline if average volume rises faster than short interest. The response illustrates the calculation using the displayed short-interest figure and ratio to infer average daily volume, then argues that an increase in short interest alongside a falling ratio implies a more than proportionate increase in that volume measure.

The explanation points to unusually heavy trading near price highs as a possible source of elevated average volume. It also raises questions about the reliability of reported short-interest data and whether the displayed figures are independently supplied or one is calculated from the other. The volume explanation is an interpretation of the chart, not a verified account of how Bloomberg produced its values; the response notes that averages can be sensitive to outliers.

Key ideas

  • The short interest ratio relates shares sold short to average daily trading volume.
  • The ratio can decline while short interest rises if average daily volume grows faster.
  • High-volume trading in the lookback period can influence the average and change the ratio.
  • The response treats elevated volume as a plausible explanation rather than a confirmed cause.
  • Reported short-interest and ratio figures may have data-quality or calculation-source uncertainties.

Tags

EquitiesStatisticsMarket microstructure
Full text
# How can short-interest ratio be decreasing when price of a stock is decreasing and amount shorted is increasing?


# How can short-interest ratio be decreasing when price of a stock is decreasing and amount shorted is increasing?












So I am looking a particular amount shorted of a stock on bloomberg. The first panel clearly shows that SI ratio is decreasing on the last data point. Also simultanously it shows the price of the security decreasing on the last data point (everything else constant, i.e. if the amount shorted did not change this should increase the short interest ratio).

Worse, the second panel of the picture, shows an increase in total amount shorted.

So overall shouldn't the Short interest ratio be increasing?

## Answer by Konstantinos (score 1)

https://quant.stackexchange.com/a/65935

The short interest is 3.264M and represents the number of shares sold short over the number of oustanding shares. So, assuming 100M outstanding shares (arbitrary number), 3.246M shares are shorted on the last day of the graph.

We also have a short interest ratio of 1.1738 for a price of 34.83 monetary units. Then, this means that average daily volume (ADV) over the last 30 trading days is $3.246M/1.1738 \approx 1.868M$.

It's clear that the last days SI increased, so more shares were shorted. At the same time, SIRatio was decreased, and this means that the ADV should have been increased disproportionally compared to SI. Averages are sensitive to outliers.

Given the security went from the 20s to 80s, huge volume of shares might have been traded near the tops, so this is aligned to my explanation above.

In addition, recent witch-hunts (!) have implied that the correct SI might not be very well reported. Are these two Bloomberg numbers (SI & SIRatio) just given data points or one is calculated based on the other?

Shown in full with attribution under the source's licence. Licence: CC BY-SA 4.0 (Stack Exchange)

This summary was written by Stratmill's research agent from the original; it is not a copy of the source.