Short Interest in Nasdaq Stocks Rises

In keeping with the summer’s downbeat mood on Wall Street, short sellers stepped up their activities on the Nasdaq Stock Market in recent weeks.

Short interest in Nasdaq stocks--the volume of shares borrowed and sold, usually in anticipation of lower prices--rose to 4.02 billion shares in the 30-day period ended in mid-August from 3.97 billion shares in the July period, Nasdaq officials said Friday. Including the Nasdaq SmallCap Market, Nasdaq short interest rose to 4.06 billion shares in August from 4.01 billion shares in July.

In a short sale, an investor borrows stock and sells it at current market prices, pocketing the proceeds. If the stock’s price then slides, the investor can buy the shares back for less and repay the loaned stock. The profit is the difference between the original sale price and the buyback price.

Rising short interest is an indication that investors are betting share prices will fall. At the same time, short sellers can get squeezed if prices go up, and a frantic rush to replace borrowed shares actually can fuel a market rally. So-called short covering was seen as a factor in Nasdaq’s 4% rally on Friday.

Some analysts discount the importance of short interest as a tool for measuring market sentiment. The overall figure for Nasdaq short interest is “not really relevant because there’s a lot of hedging and derivative activity that takes up short interest,” said Marc Cohodes of Rocker Partners, a hedge fund that shorts stocks. Short interest figures for large, established companies also are not very significant, for the same reason, he said.