Data is cheap and abundant. Separating the wheat from the chaff to create actionable information is the key to creating the value that gives you an edge.
Not so long ago, short interest was classified as alternative data. A signal that gave the reader an insight into what actions others were taking, creating an exposure to a future price movement, was transformational. As long-time purveyors of global securities finance data, which is a proxy for short interest, we’ve seen our clients using this data to support both long and short strategies.
But as it becomes a more mainstream data source, does short interest lose its edge? There seems little advantage in owning the same weapon as your competitors – unless, of course, you’re more adept at applying the knowledge it can bring.
As the COVID-19 pandemic ravages economies across the globe, those looking to take positions must manage a heady mixture of simple fundamental economics and unprecedented non-fundamental pressures and influences. Few could have predicted, for example, the extent to which nation states have delivered economic support to companies, their employees and whole industries. The simple fundamental of an evaporating client base would spell doom for many businesses, creating an easy opportunity for some. But that scenario has been complicated by the fact that the government has often stepped in to pay the wage bill.
With increasingly dislocated economies presenting a plethora of opportunities as well as risks, the agile investor has learned to combine the right mix of data to deliver the edge that they seek. Coupling short interest with other fundamental data across an industry peer group will help identify the weak spot or the most likely investment to either crash or soar. That pressure reading adds a layer of diagnosis that’s similar to having as many second opinions as you could want. Getting that data before others adds an additional edge.
But agility isn’t just about moving on opportunities earlier than your competitors. It is also about avoiding risks and losses. For example, what price would an investor pay to avoid the pain of a short squeeze? As Fig. 1 and Fig. 2 show, Gamestop Corp. (GME) was caught in a tailspin, exhibiting the three ingredients of a painful short squeeze: high or maximum utilization, meaning there was no borrowable supply left; a rising borrow cost; and a rising share price (not shown). Knowing this information can provide the insight needed to avoid such hazards, making it a vital ingredient into your investment strategy. It’s not alternative data anymore.
FIS® Short Side has been in this market for over 15 years. It collects billions of transactions across its historical data set, combined with unrivalled intraday data, to provide the foundation for customized model construction. Our API delivers access to all our data, including both the historical and intraday, on more than 50,000 securities globally, giving real agility backed by solid pattern analysis.