Stealthy Shorts: Informed Liquidity Supply

Amit Goyal, Adam V. Reed, Esad Smajlbegovic and Amar Soebhag
Additional contact information
Amit Goyal: University of Lausanne; Swiss Finance Institute
Adam V. Reed: University of North Carolina Kenan-Flagler Business School
Esad Smajlbegovic: Erasmus University Rotterdam (EUR) - Erasmus School of Economics (ESE); Erasmus Research Institute of Management (ERIM); Tinbergen Institute
Amar Soebhag: Erasmus University Rotterdam (EUR) - Department of Business Economics; Robeco Asset Management

No 24-75, Swiss Finance Institute Research Paper Series from Swiss Finance Institute

Abstract: Short sellers are widely known to be informed, which would typically suggest that they demand liquidity. We obtain comprehensive transaction-level data to decompose daily short volume into liquidity-demanding and liquidity-supplying components. Contrary to conventional wisdom, we show that the most informed short sellers are actually liquidity suppliers, not liquidity demanders. They are particularly informative about future returns on news days and trade on prominent cross-sectional return anomalies. Our analysis suggests that market making and opportunistic risk-bearing are unlikely to explain these findings. Instead, our results align with recent market microstructure theory, pointing to strategic liquidity provision by informed traders.

Keywords: Short sales; liquidity supply; informed trading; asset pricing (search for similar items in EconPapers)
JEL-codes: G10 G12 G14 G23 (search for similar items in EconPapers)
Pages: 57 pages
Date: 2024-09
New Economics Papers: this item is included in nep-mst
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Persistent link: https://EconPapers.repec.org/RePEc:chf:rpseri:rp2475

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