Member Short-Sales Ratio

Categories: Trading, Derivatives

The New York Stock Exchange is a club. It has members...and maybe secret handshakes and unpublicized parties and a speakeasy door somewhere in the basement.

We're not sure about that other stuff, but for our purposes here, it's enough to know that the NYSE...has members.

A short sale is a bet that a particular stock will go down. It involves borrowing shares, selling them and then buying them back later (hopefully after they've fallen in value). It's a bet against the market...a sign of negative sentiment.

So...the member short-sale ratio looks at the number of short sales made by members of the NYSE, versus the total number of short sales...a number that includes both NYSE members and the general investing public.

The basic assumption behind the ratio goes like this:

Members of the NYSE are established, professional Wall Street players. When they make a decision to short a stock, you can assume that the strategy came out of a rational, calculated process. Meanwhile, when a regular non-member investor jumps into a short, who knows what process they used. Fortune tellers? Dart throwing?

So the member short-sale ratio looks at the number of shorts put in place by respectable, reliable people, compared with the general number of shorts, including those put in place by excitable, relatively uninformed hoople heads.

The idea is to track the sentiment of Wall Street professionals versus the overall sentiment of the market. It's like looking at the critic score on Rotten Tomatoes versus the audience score.

Find other enlightening terms in Shmoop Finance Genius Bar(f)