Shorting in the Dark: The Dual Role of Short Sales in Off-Exchange Trading

Sebastian Schlie, Ke Xu and Xiaozhou Zhou
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Sebastian Schlie: University of Hagen
Xiaozhou Zhou: University of Quebec at Montreal

No 2605, Department Discussion Papers from Department of Economics, University of Victoria

Abstract: Using transaction-level data, we examine the role of "dark" off-exchange short sales in the U.S. stock market. We find that liquidity-providing short sales account for most short-selling activity and tend to be uninformed, acting as an important mechanism for liquidity provision, whereas liquidity-demanding short sales are primarily employed by informed traders. Nevertheless, increasing liquidity provision in dark venues reduces liquidity on lit exchanges and increases trading costs there. Since lit exchange quotes serve as benchmarks for dark venue pricing, higher trading costs on lit exchanges may, in turn, increase execution costs in dark venues.

Keywords: short selling; dark pool; broker-dealer; liquidity; price discovery (search for similar items in EconPapers)
Pages: 56 pages
Date: 2026-10
Note: ISSN 1914-2838 JEL Classification:D4, G14, G19
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Persistent link: https://EconPapers.repec.org/RePEc:vic:vicddp:2605

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