Journal article
Shorting at close range: a tale of two types
C Comerton-Forde, CM Jones, TJ Putnins
Journal of Financial Economics | Elsevier | Published : 2016
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.
Grants
Awarded by Australian Research Council
Funding Acknowledgements
We thank the Australian Research Council (ARC Linkage Project LP0455536) and the Paul Woolley Centre for Capital Market Dysfunctionality (Grant number: PWC2009) for funding. We thank the Securities Industry Research Centre of Asia-Pacific and Reuters for providing access to data used in this study. We are grateful for the comments of the editor (Bill Schwert), Hank Bessembinder (the referee), Henk Berkman, Veljko Fotak, Larry Glosten, Bruce Grundy, Larry Harris, Terry Hendershott, Albert Menkveld, Erik Theissen, Andriy Shkilko, Josef Zechner, and seminar participants at the Paul Woolley Centre for Capital Market Dysfunctionality 2009 annual conference, the European Finance Association 2010 annual conference, the Financial Management Association 2010 European conference, the Financial Management Association 2010 annual meeting, the IX Madrid Finance Workshop, the Institut Louis Bachelier market microstructure conference, the University of Technology Sydney market microstructure conference, the American Finance Association 2012 annual meeting, Baruch, the Hanken School of Economics, University of Warwick, Vienna Graduate School of Finance, the Stockholm School of Economics/Stockholm Institute for Financial Research, Hong Kong University and the University of Western Australia. This paper succeeds one by Comerton-Forde and Putnins entitled "Short selling: information or manipulation?"