DEFINITION of Member Short-Sales Ratio
The member short-sales ratios is the portion of short sales in the period under review that are transacted by members of the New York Stock Exchange (NYSE) compared to the total amount of short sales done on the exchange in that period. A short sale occurs when an investor sells a security that they have borrowed, rather than one that they own, in anticipation of a price decline for the security. The investor must deliver the security to the buyer at some point in the future at a predefined price, and if the price decline happens, he or she can purchase the security cheaper than the predefined price and deliver it for a profit. The New York Stock Exchange is considered the largest equity-based stock exchange in the world. A stock exchange is a physical or virtual place in which buyers and sellers of securities, such as stocks or bonds, come together to buy or sell their assets.
BREAKING DOWN Member Short-Sales Ratio
The calculation for the member short-sales ratio is as follows:
Member short-sales ratio = Total Short Sales on the NYSE - Non-member Transacted Short Sales
Total Short Sales on the NYSE
The result of this calculation shows the percentage of short sales that were transacted by members of the New York Stock Exchange.
To become a member of the New York Stock Exchange, applicants must complete the membership process. To qualify, applicants must be registered U.S.-based broker-dealers who are deemed a Self Regulatory Organization and have an established affiliation with a clearing firm. A broker-dealer is a licensed, registered buyer or seller of securities, and a self regulatory organization is a non-governmental, private group that in effect policies itself in the eyes of the Securities and Exchange Commission. Because of the host of requirements, members of the NYSE are regarded as professional investors.
The member short-sales ratio is referred to in order to gauge and analyze the sentiment of market professionals. By isolating the number of short sales transacted by "pros," investors can remove the unwanted noise of public traders, who may be less informed. Therefore, the ratio is often seen as an indicator of bullish or bearish trends. When these professional investors decide to sell securities short en masse, it may be taken as a sign that the experts believe a downturn in prices is imminent. By contrast, if only a small percentage of professional investors are selling securities short, it may be seen as a sign that the experts believe prices will rise. Generally, a ratio above 85% is seen as a bearish signal, while a value of less than 65% is seen as a bullish signal.