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Session 6: Short Selling
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Stealthy Shorts: Informed Liquidity Supply 1University of Lausanne; 2Swiss Finance Institute; 3University of North Carolina; 4Erasmus School of Economics; 5Robeco Quantitative Investments Short sellers are widely known to be informed, which would typically suggest that they demand liquidity. We obtain comprehensive transaction-level data to decompose daily short volume into liquidity-demanding and liquidity-supplying components. Contrary to conventional wisdom, we show that the most informed short sellers are actually liquidity suppliers, not liquidity demanders. They are particularly informative about future returns on news days and trade on prominent cross-sectional return anomalies. Our analysis suggests that market making and opportunistic risk-bearing are unlikely to explain these findings. Instead, our results align with recent market microstructure theory, pointing to the strategic liquidity provision by informed traders.
Mutual Fund Shorts and the Marginal Benefits of Acquiring Information 1Texas A&M University; 2University of North Carolina We study the information acquisition behavior of mutual funds and the performance of both their long and short positions. We show that managers learn more about their shorts than their longs because the benefit of acquiring information about shorts is larger. Mutual funds' shorts also generate better returns than their longs, but, at least with respect to shorts, performance and information acquisition are inversely related. Though surprising at first glance, this follows from standard theory and we show that managers acquire less information about certain high performing short positions; the clear winners.
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