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Shorting in Broad Daylight: Short Sales and Venue Choice

Published online by Cambridge University Press:  07 October 2019

Adam V. Reed ,
Mehrdad Samadi  and
Jonathan S. Sokobin
Adam V. Reed*
Affiliation:
Reed, [email protected], University of North Carolina Kenan–Flagler Business School
Mehrdad Samadi
Affiliation:
Samadi, [email protected], Southern Methodist University (SMU) Cox School of Business
Jonathan S. Sokobin
Affiliation:
Sokobin, [email protected], Financial Industry Regulatory Authority (FINRA)
*
Reed (corresponding author), [email protected]
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Abstract

Using a novel database on venue short sales and market design characteristics, we ask: Where do short sellers exploit their information advantage? Consistent with the prediction of Zhu (2014), we find that exchange short sales comprise a larger proportion of trading and are more informative about future prices than dark-pool short sales, particularly when there is greater competition among short sellers to trade and in the presence of short-lived information. When examining market design characteristics, we find that dark pools offering volume-weighted average price crossing attract more short sales, whereas those offering block trading attract fewer short sales.

Type
Research Article
Information
Journal of Financial and Quantitative Analysis , Volume 55 , Issue 7 , November 2020 , pp. 2246 - 2269
Copyright
Copyright © Michael G. Foster School of Business, University of Washington 2019

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Footnotes

We thank participants at the 2018 European Finance Association, 2017 Society for Financial Studies Cavalcade, 2018 Lone Star Finance Conference, 2019 Dauphine Hedge Fund Conference, University of North Carolina, Federal Reserve Board of Governors, Federal Reserve Bank of New York, SMU Cox School of Business, U.S. Securities and Exchange Commission, Commodity Futures Trading Commission, North Carolina State, and Office of Financial Research and Jim Angel, Jonathan Brogaard, Jennifer Conrad, Amy Edwards, Joey Engelberg, René Garcia, Frank Hatheway, TJ Herrington, Charles Jones, Nick Maslavets, Marios Panayides, Talis Putnins, Chris Stone, Clara Vega, Kumar Venkataraman, James Yae, Bart Yueshen, and Haoxiang Zhu.

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