Shorting at Close Range: A Tale of Two Types
University of Melbourne - Department of Finance; Financial Research Network (FIRN)
Charles M. Jones
Columbia Business School - Finance and Economics
Tālis J. Putniņš
University of Technology, Sydney - UTS Business School; Stockholm School of Economics in Riga; Financial Research Network (FIRN)
June 17, 2014
AFA 2012 Chicago Meetings Paper
Columbia Business School Research Paper No. 12/22
We examine stock returns, order flow, and market conditions in the minutes before, during, and after recent short sales on the NYSE and Nasdaq. We find two very distinct types of short sales: those that provide liquidity, and those that demand it. Shorts that supply liquidity do so when spreads are unusually wide. These short sellers are also strongly contrarian, stepping in to initiate or increase a short position after fairly sharp share price rises over the past hour or so, and they tend to face greater adverse selection than other liquidity suppliers. In contrast, shorts that demand liquidity tend to follow short-term price declines. These results are consistent with a competitive rational expectations model where both market-makers and informed traders use short sales. The evidence indicates that these two types of shorting are integral to both price discovery and liquidity provision.
Number of Pages in PDF File: 48
Keywords: short selling, information content, market quality, high-frequency trading
JEL Classification: G14, G19
Date posted: March 21, 2011 ; Last revised: June 30, 2014
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