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Minyan Mailbag - Odd Lot Short Sales

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You guys STILL doubt me?!

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Note: Our goal in Minyanville is to remove intimidation from the financial markets and encourage an interactive dialogue among the Minyanship. We share this next article with that very intent.

I have been wondering for some time about the odd-lot short sale measurements. Your brothers-in-arms (or well-armed brothers) are perhaps equipped to shed some light. Biases aside, is it possible with the meaningful use of programs that a 15k share short sale being worked by a computer in lots is being "mis-classified"? My guess is not, and that the aggregate numbers of the short-seller are ultimately addressed (making the odd-lot statistics still valid as measured), but I defer to someone with a more intimate knowledge on the matter. The coincidence of massive program trading and some goofy odd-lot metrics required that I ask.

Best always, Minyan Steve

Steve,

There is always the chance in whatever measures we follow that there is some manipulation going on. In fact, I assume that is always the case. I am particularly curious about odd-lot short sales because, as I have noted here several times over the past couple of months, this figure has been acting fairly "odd" in 2005.

Actually, odd lot short sales began to spike as soon as the new year began - that could simply be a reflection of concern among small traders, or even perhaps something tax-related, but it seems awfully coincidental that the day the new year began (when several new regulations took effect) that suddenly we would see historic levels of extremes in odd lot shorts.

Still, even if we can't know for sure, we can try to determine what is likely. A big day for odd lot short sales is 2,000,000 shares. That is about 0.2% of total NYSE volume, and it's hard to imagine that it would make much of a difference to institutions trying to game the rules (e.g. by avoiding the uptick rule).

My conclusion is the same as yours - I'm a bit leery of the data, but still convinced it can be an effective proxy for wrong-way sentiment. When we see spikes in odd lot shorts, I continue to view it as a bullish development.

I hope that helps,

Jason

No positions in stocks mentioned.

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