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October 8, 2022

Short Volume and Market Behaviors

Signal: Market Structure Sentiment
A solo micro-pod detailing daily musings of building a financial technology business. Thomas Dadmun is the founder of Point Focal, a portfolio analytics firm helping PMs, traders, and analysts at financial firms monetize data.
Focus Signal explains building portfolio analytics at Point Focal. Signal pieces are the analytics. Semi-quantitative U.S. equities analysis and research covering venues, earnings, market structure sentiment, news, news sentiment, and ESG.
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Episode details:

Dramatic moves in short volume reflect dramatic changes in market maker1 behavior. And not all market participant behaviors are equal.

Two recent headlines were preceded by two recent plunges. The headlines attracted attention amid extreme price movements. The plunges occurred in silence.

Let’s begin at the end.

“Alzheimer's Drug Study Yields Positive Results, say makers Eisai and Biogen” - Reuters, 9/27/22

Biogen closed at $197 on 9/27 and $276 on 9/28, up 40%.

“Elon Musk Proposes Closing Twitter Deal on Original Terms” - Wall Street Journal, 10/4/22

Twitter closed at $42 1/22 on 10/3 and $52 on 10/4, up 22%.

The plunges did not measure news stories or price activity. They measured short volume, the amount of stock produced by market makers to meet demand from buyers.

Biogen stock was relatively quiet throughout the summer. In September short volume surged to over 55%, meaning more than half of all activity was facilitated by market makers willing to create stock to sell Biogen to buyers. This short volume level was elevated from a baseline of around 40% and coincided with a spike in sentiment derived from order routing information.

Then over a period of less than two weeks, short volume plunged from 56% to 35%, a 40% drop, bottoming 9/26. This is a dramatic change in market maker behavior. They were no longer willing to create stock to sell Biogen to buyers.

The date of the positive drug study headline that saw Biogen soar 40% was 9/27.

Biogen Market Structure Sentiment

Twitter stock was similarly quiet throughout the summer despite the uncertainty surrounding its future ownership. Market makers were increasingly willing to sell Twitter to buyers while Elon used the platform to explain why he no longer wanted to own the company he agreed to purchase3.

Then short volume indicated a change in market maker behavior, falling from nearly 60% to 37% in half a month, bottoming 10/4, the date Elon’s proposal to close the deal at its original terms made headlines.

A 38% plunge in short volume, followed by price appreciation of 24%.

Twitter Market Structure Sentiment

Short volume is the supply side of the market structure sentiment economic model. Even in isolation it can be telling. Coupled with the demand side of the equation, order routing information, it becomes more insightful. This will be explored in future Signals posts.

When I was a market maker, I never really considered the fact that I didn’t need to borrow stock to short stock. But this afterthought is an incredible luxury afforded by the SEC to market makers via their exemption to regulation SHO Rule 203(b) (1) and (2)4.

Market makers have more information than other market participants, including inventory levels, institutional and retail flows, and order size and depth. Information become inputs to market maker decisions to sell inventory, to sell manufactured stock (via the aforementioned exemption), or to sell at all.

Short volume captures this decision making process. High levels indicate market makers are willing to create stock to sell to buyers, leaving market makers short. Low levels indicate market makers are unwilling to create stock to sell to buyers, leaving market makers neutral or long.

The market maker exemption is designed to facilitate orderly markets. And one can argue it accomplishes its goal. But orderly markets needs its own definition.

Here’s one: the ability for the less-informed to easily buy securities from the more-informed.


Market maker definition.


Stocks used to trade in fractions. Forty-two and a laugh, trading slang for 1/2, is accurate enough for this analysis. The actual price was 42.54, .0009% higher than a laugh.


Matt Levine’s ongoing coverage of the Elon / Twitter saga is a financial comedy triumph. Here is an excerpt: “The point I want to make here is that Elon Musk has attained a level of wealth and power where sometimes he gets text messages offering him $5 billion and he replies with a thumbs-down and moves on with his day.”


Regulation SHO Rule 203(b) (1) and (2): Locate Requirement. Regulation SHO requires a broker-dealer to have reasonable grounds to believe that the security can be borrowed so that it can be delivered on the date delivery is due before effecting a short sale order in any equity security. This “locate” must be made and documented prior to effecting the short sale.

* Market makers are exempt.

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