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Shorting at close range: A tale of two types

Author

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  • Comerton-Forde, Carole
  • Jones, Charles M.
  • Putniņš, Tālis J.

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.

Suggested Citation

  • Comerton-Forde, Carole & Jones, Charles M. & Putniņš, Tālis J., 2016. "Shorting at close range: A tale of two types," Journal of Financial Economics, Elsevier, vol. 121(3), pages 546-568.
  • Handle: RePEc:eee:jfinec:v:121:y:2016:i:3:p:546-568
    DOI: 10.1016/j.jfineco.2016.05.002
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    References listed on IDEAS

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    Citations

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    Cited by:

    1. Fernando Chague & Rodrigo De Losso, Bruno Giovannetti, 2017. "Uncovering Skilled Short-sellers," Working Papers, Department of Economics 2017_01, University of São Paulo (FEA-USP).
    2. Michael McKenzie & Ólan T. Henry, 2012. "The determinants of short selling: evidence from the Hong Kong equity market," Accounting and Finance, Accounting and Finance Association of Australia and New Zealand, vol. 52, pages 183-216, October.
    3. Warren Bailey & Lin Zheng, 2013. "Banks, Bears, and the Financial Crisis," Journal of Financial Services Research, Springer;Western Finance Association, vol. 44(1), pages 1-51, August.
    4. repec:cai:finpug:fina_372_0039 is not listed on IDEAS
    5. von Beschwitz, Bastian & Chuprinin, Oleg & Massa, Massimo, 2015. "Why Do Short Sellers Like Qualitative News?," International Finance Discussion Papers 1149, Board of Governors of the Federal Reserve System (U.S.).

    More about this item

    Keywords

    Short selling; Information content; Market quality; High-frequency trading;

    JEL classification:

    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G19 - Financial Economics - - General Financial Markets - - - Other

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