As the stock exchanges prepare to release their monthly short interest reports this week, Wall Street is waiting with more anticipation than usual.
This month's short selling data marks the first full month in which investors will be able to see how the removal of the uptick rule, which restricted how short sellers could trade, has affected the markets.
Short interest has been steadily rising to record levels since February and investors will also be looking at the data for information about how short sellers may be affecting market volatility.
The swiftness of the decline has really been something we've noticed, said Bruce Zaro, chief technical strategist at Delta Global Advisors in Plymouth, Massachusetts. That really tells me we've built up quite a bit of fear and I think that's manifested in the ... short selling figures.
Investors who sell securities short profit from betting stocks will fall. Short-sellers borrow shares, then sell them, waiting for the stock to fall so they can buy the shares at the lower price, return them to the lender and pocket the difference.
In July the U.S. Securities and Exchange Commission removed the restrictive uptick rule for short sellers that required they only sell at a price above the last quoted price of a stock, or at the price of the stock's last trade if it was higher than the previous price.
It just a bit easier to implement short positions, said Charles Lieberman, chief investment officer of Advisors Capital Management in Paramus, New Jersey. There's obviously a transition period where you go from one regime where there's an uptick rule and to one where there isn't. Presumably in that period short interest positions will increase.
Since the SEC lifted the uptick restriction on July 6, last month's short-selling data only reflected a few days of activity under the new rules. But even then, short interest rose to record levels on the Nasdaq and New York Stock Exchange.
As world stock markets have been roiled by volatility in recent weeks, investors will also be looking to the role short sellers are playing in the market overall.
If short interest is very high, that's a lot of pent up demand for buying securities at some point, Lieberman said. That potentially creates a cushion.
Funds that focus on short selling have lagged the market for most of the year as major stock indexes marched up to record highs. But last month, as volatility in the market picked up and problems in the risky U.S. subprime mortgage sector began spreading to other markets, their fortunes have improved.
In June, short sellers were up 2.9 percent for the year, on average, and in July they boosted their performance to a gain of 5.3 percent for the year, according to Treflie Capital Management's short selling manager index.
The New York Stock Exchange is due to release its short interest data for dates through mid-August on Tuesday, while the Nasdaq is expected to release its mid-August report on Friday.