What Is the Specialist Short Sale Ratio?

The specialist short sell ratio is a measure of specialists' short-selling activity on the New York Stock Exchange (NYSE). Specialists facilitate trading in certain stocks and make a market in the stock they trade by displaying their best bid and asking prices to the market during trading hours. The short sell ratio compares specialist activity to the short sales of the entire NYSE. The significance of this measure has declined in recent years due to high-frequency trading (HFT).

Key Takeaways:

  • The specialist short sell ratio measures specialists' short-selling activity of specialists on the New York Stock Exchange (NYSE).
  • The ratio compares this activity to the short sales of the entire NYSE.
  • This ratio is calculated by dividing the number of specialists’ short sales by the total number of short sales on the NYSE.
  • High-frequency trading has caused the short sell ratio to be less significant in recent years.

Understanding the Specialist Short Sale Ratio

The specialist short sell ratio is a measure of short-sale activity by market makers on the NYSE. These market makers are known as specialists. Each specialist is charged with balancing incoming buy and sell orders on a portfolio of stocks to facilitate trading on those shares.

Many analysts believe that specialists have a unique perspective on trading activity and thus make better-informed bets with their own trades. Critics might respond that, for many years, NYSE oversight of specialists has been light and point to disciplinary action that the exchange took against a handful of specialist firms in 2003.

In 2003, firms were accused of abusing their position to profit from trading activity when they should have been acting as neutral facilitators. Electronic trading platforms have increasingly displaced specialists on the NYSE and other exchanges. However, proponents of the specialist system argue that they provide liquidity and manage volatility in a way that electronics cannot.

This ratio is calculated by dividing the number of specialists’ short sales by the total number of short sales on the NYSE. The exchange publishes this data with a lag time of approximately two weeks.

High-Frequency Trading and Short Sell Ratios

The specialist short sell ratio has become a less frequently used indicator in the early 21st century. One reason for this is the rise of HFT and the impact that it has had on the total number of short sales, or short interest, in current markets. As HFT has risen in prominence in recent years, it has accounted for a significant portion of short interest.

Special Considerations

However, these trades are not necessarily the bearish bets against the market that they might have been in the past. High-frequency traders tend to cover their short positions quickly, and have greatly improved access to small-cap stocks. This access provides traders with a wider range of companies to short. Both of these factors mean that a high-frequency short seller tends to be exposed to far less risk than a traditional short seller in the past. Less risk leads to more short selling, which can distort the significance of the specialists’ portion of short interest.