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Shorting at Close Range: A Tale of Two Types

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

Carole Comerton-Forde

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)

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 Putniņš, Tālis 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

Financial Research Network (FIRN)

C/- University of Queensland Business School
St Lucia, 4071 Brisbane
Queensland
Australia

HOME PAGE: http://www.firn.org.au

Charles M. Jones (Contact Author)

Columbia Business School - Finance and Economics ( email )

3022 Broadway
New York, NY 10027
United States
(212) 854-5553 (Phone)

HOME PAGE: http://www.columbia.edu/~cj88/

Talis J. Putnins

University of Technology Sydney - UTS Business School ( email )

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

Stockholm School of Economics in Riga ( email )

Strelnieku Iela 4a
Riga, LV1010
Latvia
+371 67015841 (Phone)

Financial Research Network (FIRN)

C/- University of Queensland Business School
St Lucia, 4071 Brisbane
Queensland
Australia

HOME PAGE: http://www.firn.org.au

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