Shorting in Broad Daylight: Short Sales and Venue Choice

Reed, Adam V.; Samadi, Mehrdad; Sokobin, Jonathan S.

doi:10.1017/s0022109019000802

Cited by 32 publications

(10 citation statements)

References 56 publications

Supporting

Mentioning

Contrasting

Order By: Relevance

“…They find that, while short sellers are responsible for a substantial fraction of dark pool trading, the proportion of short sales is greater on the exchanges than in dark pools. Reed et al (2018) find that short sales executed on exchanges contribute more to price informativeness than short sales executed in dark pools. They also find that short sales on exchanges and their contribution to price informativeness are even greater around corporate news events, which suggests that event-driven short selling (i.e.…”

Section: Related Literature and Hypothesis Developmentmentioning

confidence: 78%

“…Reed et al (2018) use short selling as a proxy for informed trading to provide additional evidence consistent with Zhu (2014). They find that, while short sellers are responsible for a substantial fraction of dark pool trading, the proportion of short sales is greater on the exchanges than in dark pools.…”

Section: Related Literature and Hypothesis Developmentmentioning

confidence: 90%

“…This study contributes to the growing literature on dark pools by providing evidence that short interest and dark pool volume are correlated. The most closely related studies are Garvey et al (2016), which investigates why traders choose dark markets, and Reed et al (2018), which considers the implications of short sellers' trading venue decisions. This study differs from prior studies, in that we focus on the relation between short selling based on firm fundamentals and dark pool volume.…”

Section: Introductionmentioning

confidence: 99%

See 2 more Smart Citations

Short selling and dark pool volume

Boulton

Braga‐Alves²

2020

View full text Add to dashboard Cite

PurposePrior research posits that traders with short-lived information favor lit exchanges over dark pools due to execution certainty. This paper aims to focus on the relation between informed trading based on firm fundamentals and dark pool volume because the preferred venue for traders with longer-lived information is less certain.Design/methodology/approachThe authors examine the effect of short interest, a proxy for informed traders with long-lived information, on dark pool volume using fixed effects, first difference and instrumental variable approaches. They examine the effect of dark pools on the profitability of long-lived information using market- and characteristic-adjusted returns.FindingsThe proportion of trading volume executed in dark pools is positively correlated with short interest. This result is stronger for stocks that suffer from greater uncertainty and stocks targeted by transient institutional investors. Short sellers profit substantially from their information as subsequent returns are lower for heavily shorted stocks with greater dark pool volume.Research limitations/implicationsIn 2014, the Financial Industry Regulatory Authority began making trading data available for dark pools. Before that, only limited information was publicly available. The authors use that data to shed more light on dark pools activity.Practical implicationsThe evidence presented in the paper helps inform the current discussion about the role and regulation of dark pools.Originality/valueThis is the first study to show that informed traders with long-lived information favor dark pools due to their opacity and the possibility of price improvement.

show abstract

Section: Related Literature and Hypothesis Developmentmentioning

confidence: 78%

Section: Related Literature and Hypothesis Developmentmentioning

confidence: 90%

Section: Introductionmentioning

confidence: 99%

See 1 more Smart Citation

Short selling and dark pool volume

Boulton

Braga‐Alves²

2020

View full text Add to dashboard Cite

show abstract

“…Comerton-Forde and Putnins (2015) reach a similar conclusion on the informativeness of offexchange trades using an Australian sample. Reed et al (2018) show that short sellers, which are typically informed, trade more on exchanges than in dark pools. To be sure, not all informed trades are expected to migrate to exchanges (e.g., Nimalendran and Ray, 2014).…”

Section: The Post-earnings Announcement Drift (Pead)mentioning

confidence: 99%

Off-Exchange Trading and Post Earnings Announcement Drift

2019

View full text Add to dashboard Cite

Off-exchange trading, which tends to attract uninformed trades, accounts for about 35 percent of total trading volume today. Taking uninformed trades off exchanges harms liquidity but improves price discovery, indicated by a decline in intraday price inefficiency (deviation of price changes from a random walk). We examine whether it also decreases an accounting inefficiency: investor underreaction to quarterly earnings news. Our results, based on investigation of a large panel of US firms and a natural experiment created by the SEC's Tick Size Pilot program, suggest the opposite conclusion: off-exchange trading increases underreaction to earnings news. The negative effects of off-exchange trading on liquidity (less depth and wider spreads) likely increase arbitrage costs, thereby reducing arbitrage activity that partially corrects underreaction. We find that the positive relation between off-exchange trading and underreaction remains strong even when we control for a host of observable arbitrage cost measures. Levels of off-exchange trading appear to serve as a useful proxy for hard-to-measure arbitrage costs.

show abstract

“…;Berkman and Eugster 2017;Rees and Twedt 2019;Reed et al 2019) use the publicly available short sale data from FINRA. Hu (2017) mentions that following a concern raised by the U.S. Securities and Exchange Commission about market transparency, FINRA began publishing daily aggregate short volume data for each stock in the FINRA website from 2009.22 …”

mentioning

confidence: 99%

Do Corporate Restructuring Announcements Imply Bad News? Evidence from Short Selling

Henderson¹,

Jahan²,

Reichelt³

2020

Preprint

View full text Add to dashboard Cite

Despite a lengthy record of research into equity market investors' short-term responses to restructuring announcements, results remain ambiguous. In this study, we investigate investors' reactions to restructuring announcements based on the behavior of short sellers. Relative to other equity investors, short sellers are better equipped to discern whether restructuring plans will succeed. In a sample of corporate restructurings announced from 2010 to 2017, we find evidence of increased trading by short sellers on and after (but not before) restructuring announcements. We find a modest but significant association between short selling activity on or after the restructuring announcement and negative future stock returns. For cost restructurings, we find evidence of a strong association between short selling activity and the restructuring announcement and negative future stock returns, but not for asset restructurings. This result suggests short sellers only trade profitably on cost restructuring announcements, meaning those firms' restructuring announcements foretold bad news.

show abstract

Shorting in Broad Daylight: Short Sales and Venue Choice

Cited by 32 publications

References 56 publications

Short selling and dark pool volume

Short selling and dark pool volume

Off-Exchange Trading and Post Earnings Announcement Drift

Do Corporate Restructuring Announcements Imply Bad News? Evidence from Short Selling

Contact Info

Product

Resources

About