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Journal of Financial Economics Vol. 121 No. 3 2016

Shorting at close range: A tale of two types

Carole Comerton-Forde; Charles M. Jones1,2; Tālis J. Putniņš3,4

1 New York Hall of Science · 2 Columbia University · 3 Stockholm School of Economics in Riga · 4 University of Technology Sydney

open access

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.

DOI
10.1016/j.jfineco.2016.05.002
Volume
121
Issue
3
Pages
546-568
Language
en
Sources
bibtex:phds-export.bib openalex crossref

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