Shorting at close range: A tale of two types

Carole Comerton-Forde, Charles Jones and Talis Putnins

Journal of Financial Economics, 2016, vol. 121, issue 3, 546-568

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.

Keywords: Short selling; Information content; Market quality; High-frequency trading (search for similar items in EconPapers)
JEL-codes: G14 G19 (search for similar items in EconPapers)
Date: 2016
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Citations: View citations in EconPapers (30)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:jfinec:v:121:y:2016:i:3:p:546-568

DOI: 10.1016/j.jfineco.2016.05.002

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