Information Leakage from Short Sellers

Abstract

Using granular data on the entire Brazilian securities lending market merged with all trades in the centralized stock exchange, we identify information leakage from short sellers. Our identification strategy explores trading execution mismatches between short sellers' selling activity in the centralized exchange and borrowing activity in the over-the-counter securities lending market. We document that brokers learn about informed directional bets by intermediating securities lending agreements and leak that information to their clients. We find evidence that the information leakage is intentional and that brokers, clients and short sellers benefit from it. We also study leakage effects on stock prices.

Keywords: short selling, securities lending, brokers, information leakage

JEL Classification: G12, G14, G23, G24