Short-Sellers: The Limits Of SIR In Measuring Sentiment

While individual investors may pour money into the hot stock of the moment and pull it back out at the first time of trouble, short-selling is still mostly the domain of sophisticated investors, so when a stock’s short-interest ratio (SIR) starts going up there’s good reason to start looking for problems. But it turns out that the supply of lendable shares often constrains the market, keeping SIR at low levels even when actual short interest is high.

“Even in the most liquid equity market in the world, the pool of readily borrowable shares can be a frequently binding constraint to informational arbitrage,” write M.D. Beneish, C.M.C. Lee, and D.C....