Shorting at Close Range: A Tale of Two Types

50 Pages Posted: 21 Mar 2011 Last revised: 26 Jun 2015

See all articles by Carole Comerton-Forde

Carole Comerton-Forde

University of Melbourne - Department of Finance

Charles M. Jones

Columbia University

Tālis J. Putniņš

University of Technology Sydney (UTS); Stockholm School of Economics, Riga

Date Written: March 18, 2015

Abstract

We examine returns, order flow, and market conditions in the minutes before, during, and after NYSE and Nasdaq short sales. We find two distinct types of short sales: those that provide liquidity, and those that demand it. Liquidity-supplying shorts are strongly contrarian at intraday horizons. They trade when spreads are unusually wide, facing greater adverse selection. Liquidity-demanding shorts trade when spreads are narrow and tend to follow short-term price declines. These results support a competitive rational expectations model where both market-makers and informed traders short, indicating that these two shorting types are integral to both price discovery and liquidity provision.

Keywords: short selling, information content, market quality, high-frequency trading

JEL Classification: G14, G19

Suggested Citation

Comerton-Forde, Carole and Jones, Charles M. and Putnins, Talis J., Shorting at Close Range: A Tale of Two Types (March 18, 2015). Journal of Financial Economics (JFE), Forthcoming, AFA 2012 Chicago Meetings Paper, Columbia Business School Research Paper No. 12/22, Available at SSRN: https://ssrn.com/abstract=1787677 or http://dx.doi.org/10.2139/ssrn.1787677

Carole Comerton-Forde

University of Melbourne - Department of Finance ( email )

198 Berkeley Street
Carlton VIC 3010
Australia

Charles M. Jones (Contact Author)

Columbia University ( email )

3022 Broadway
New York, NY 10027
United States

Talis J. Putnins

University of Technology Sydney (UTS) ( email )

PO Box 123
Broadway
Sydney
Australia
+61 2 9514 3088 (Phone)

Stockholm School of Economics, Riga ( email )

Strelnieku iela 4a
Riga, LV 1010
Latvia
+371 67015841 (Phone)

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