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Shorting at close range: A tale of two types

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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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    More about this item

    Keywords

    Short selling; Information content; Market quality; High-frequency trading;
    All these keywords.

    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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