Short selling is often misunderstood, from theories about naked shorts to coordinated attacks and phantom shares. We have written a number of times to explain how short selling actually works, how short sellers are a smaller part of the market than most people assume and how if naked shorts existed, we should see a lot more fails than the data shows.
Today, we delve into the latest short interest data (spoiler alert: it’s rising for most companies).
We also highlight Nasdaq’s new Short Selling Resource Hub for companies to learn more.
Short interest is rising
The level of short interest as a percentage of each company’s market cap shows that short interest has almost doubled since 2022. That’s despite a prolonged rally in the market (gray area in the chart), which should infer that shorts have large losses — a difficult trade to hold for so long.
Chart 1: Short interest tracks the S&P 500; it rises in bull markets, not bear markets
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Interestingly, the data also shows that small- and mid-cap stocks consistently have higher short interest than large caps – roughly double the proportion of their shares outstanding.
Short interest often barely moves when fear spikes
Intuitively, increasing short interest sounds like traders are increasingly bearish.
But as we show below, it’s likely not the case.
Typically, when VIX – the market’s so-called fear gauge – spikes, the market sells off. But plotting the VIX against median short interest (Chart 2) shows almost no correlation. Instead, short interest barely changes – either in the lead-up to the selloff, or immediately after. This would support the view that a lot of short interest is mechanical hedging of liquidity products like futures and exchange-traded funds (ETFs).
Chart 2: Short interest is typically stable when the VIX spikes; shorts are not driving volatility
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This makes sense once you remember that dedicated short sellers – the hedge funds whose entire strategy is to bet against companies based upon fundamentals – represent under 5% of total hedge fund assets.
Importantly, the majority of short activity comes from intermediaries, such as market makers, broker-dealers, and arbitrageurs, whose short positions are part of providing liquidity and hedging risk, often for less than a day. Consequently, those players are more likely to reduce their short positions as volatility (and margin calls) increase.
Short interest charts look different depending on what you measure it against
Another common way to look at short interest is to compare shorts to daily liquidity.
When you express short interest as a percentage of average daily volume (ADV), we see that shorts have instead fallen.
We note that since early 2020, the U.S. stock market has seen a surge in trading driven by heightened retail trading. Because that liquidity has increased faster than the short interest, the short interest liquidity ratio has fallen.
Chart 3: Surges in ADV make short interest appear to be falling; using TSO is a cleaner measure
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The difference between short sale volume and short sale interest is something even FINRA has tried to address publicly. As FINRA notes on its website, investors may “occasionally perceive the percentage of short sale volume to be unusually high or inconsistent with reported short interest data,” and this “perception may cause market participants to draw inaccurate conclusions.”
Smaller companies carry more short interest, but even then, it’s modest
One question we hear often from issuers: Is our short interest level unusual?
Chart 4 helps put that in context. One pattern is clear, as we’ve noted before, index inclusion matters!
We see index stocks (green and blue dots) tend to range between 1%-10% of their shares being short, with a median stock having 3.4% of shares shorted. Just a handful of names — think BYND, HIMS, or NBIS — sit well above those ranges.
Chart 4: Smaller stocks carry proportionally more short interest, but median levels are still modest across the board
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There is a mechanical reason why stocks with no index inclusion (black dots) tend to have lower short interest than other stocks. Being in an index means:
- Mutual funds own your stock, and mutual funds often operate stock lending programs to enhance their fund returns. (Stock loan is important, as short sellers need to locate (and borrow) shares they short sell; otherwise, we would see settlement failures – which we don’t.)
- Indexes are used for futures and ETFs and swaps – all of which need hedging. Hedges may involve short stock positions vs long derivatives.
Nasdaq’s new Short Selling Resource Hub puts everything in one place
If you’re looking for short-selling information in a centralized place, you might be interested in checking out Nasdaq’s recently launched Short Selling Resource Hub, an online, public resource designed for issuers, retail investors, and anyone else trying to separate facts from fiction.
The hub covers five core areas:
- How short selling works, including a plain-English walkthrough of the borrow-sell-deliver mechanics.
- Existing regulatory protections, such as Reg SHO, the Short Sale Circuit Breaker, close-out rules, and more.
- Key market data — where to find short interest, daily short volume, and fails-to-deliver data from FINRA, the exchanges, and the U.S. Securities and Exchange Commission (SEC).
- Academic research on the impact of short selling on the market (spoiler: the evidence generally points to tighter spreads and better price discovery).
- What short data is available to you and what improvements Nasdaq has advocated for, consistently, since 2015.
Several charts on the hub will look familiar to regular readers of this blog. The hub also includes a handy data directory (FINRA short interest and short volume feeds, the SEC’s fails-to-deliver database, Nasdaq’s own short interest reports), so market participants always know where to go.
Transparent markets benefit everyone. That’s why we built it.
The bottom line
Although short interest is rising, the data suggests that doesn’t necessarily signal a market top – or increased bearishness. Instead, the data likely points to more hedging and liquidity provision.
Another thing we learned today is that short interest is best measured as a percentage of Shares outstanding (TSO), not liquidity (ADV) – as spikes in ADV can make short positions look like they are shifting when they are not.
We know no company likes investors shorting their stock, but shorts are an important part of the market. Research consistently shows the market is more efficient and cheaper to trade when shorts are allowed — and that should help boost liquidity and prices.
