Stealthy shorts: Informed liquidity supply

Amit Goyal, Adam V. Reed, Esad Smajlbegovic and Amar Soebhag

Journal of Financial Economics, 2025, vol. 172, issue C

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)
Date: 2025
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Persistent link: https://EconPapers.repec.org/RePEc:eee:jfinec:v:172:y:2025:i:c:s0304405x25001631

DOI: 10.1016/j.jfineco.2025.104155

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