Shorting at close range: A tale of two types

Carole Comerton-Forde, Colwyn M. Jones, Tālis Putniņš

Research output: Contribution to journalArticlepeer-review

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.
Original languageEnglish
Pages (from-to)546-568
JournalJournal of Financial Economics
Volume121
Issue number3
Early online date24 May 2016
DOIs
Publication statusPublished - Sep 2016

Keywords

  • short selling
  • infomation content
  • market quality
  • high-frequency trading

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