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Does Daily Short Volume Predict Short Interest? Evidence… - Equibles

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Summary

Across 660,246 settlement windows, a 26,213-parameter numeric transformer reached +0.414 pooled Spearman in a retrospective 2025–July 2026 test, versus +0.343 for ridge and +0.305 for a transparent composite. It estimates completed settlement endpoints, not daily positions or a trading signal.

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Abstract

Using 660,246 settlement windows across 6,959 stocks from January 2020 through July 2026, this study tests whether FINRA's daily off-exchange short-volume data contains information about concurrent changes in twice-monthly reported short interest. The conventional change in the short-volume ratio produces a pooled Spearman correlation of +0.229.

Among 32 transparent alternatives, an equal-weight composite of within-date ranks for ratio change, market-relative level, and excess short flow raises the pooled correlation to +0.263. In the retrospective 2025–July 2026 test period, raw-feature ridge reaches +0.343 and a 26,213-parameter numeric-transformer ensemble reaches +0.414; the transformer estimates settlement-window endpoints rather than daily positions.

The evidence supports a nowcasting interpretation only. The signals are contemporaneous, have little relationship with the following settlement window, and do not produce a material return forecast. Because the later period was inspected during model development and the FINRA history uses final-file rather than point-in-time vintages, prospective validation remains necessary.

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Background and research question

Short interest is a stock—the number of shares held short at a settlement date—whereas short volume is a flow of executions during a trading period. The two measures can overlap, but they are not interchangeable. A market maker, for example, may sell short while filling a customer order and cover later that day; the opening trade appears in the daily short-volume file even though no position remains at the short-interest settlement date.

FINRA accordingly warns that its daily files cover publicly disseminated trades rather than consolidated exchange activity or open positions. The empirical question is therefore narrower than whether short volume “becomes” short interest: does noisy daily flow, aggregated over a complete settlement window, retain information about the contemporaneous change in the reported position?

Data and sample construction

The analysis joins three production datasets. Daily short volume: FINRA's consolidated NMS and OTC daily short-sale files from January 2020 through July 2026, aggregated across the facilities represented in those files. Short interest: twice-monthly observations aligned to FINRA's official settlement and publication calendar. Prices: the exact listed security's split-adjusted daily series for the return tests; securities are never joined through fuzzy ticker matching.

For each stock and settlement date, the trading window begins after the previous settlement date and ends on the current settlement date. Construction follows the official calendar through the May 2024 transition from T+2 to T+1 settlement.

Sample filters

Step<br>Windows remaining<br>Dropped

Consecutive settlement pairs<br>855,047

At least 7 trading days<br>778,026<br>77,021

Prior short interest of at least 10,000 shares<br>714,093<br>63,933

Average daily off-exchange volume of at least 10,000 shares<br>661,906<br>52,187

No stock split inside the window<br>660,246<br>1,660

The final eligible sample contains 660,246 windows across 6,959 stocks and 156 settlement dates.

The comparable formula panel contains 653,459 observations for which every component of the baseline and composite scores is available. The difference is primarily the initial history required to calculate changes and trailing expectations.

Short interest increased in 49.7% of eligible windows. The cross-sectional average short-volume ratio was 46.4% of the off-exchange volume in the files.

Empirical design

For stock i in settlement window t, define the window's short-volume ratio as:

R_{i,t} = \frac{\text{total short volume in window }t}{\text{total reported volume in window }t}

The ratio is therefore volume-weighted across the days of the window.

The...