Shorting at Close Range: A Tale of Two Types
50 Pages Posted: 21 Mar 2011 Last revised: 26 Jun 2015
Date Written: March 18, 2015
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: Suggested Citation