Work

Stealthy shorts: Informed liquidity supply

Year: 2025

Type: article

Abstract: 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 strategic liquidity provision by informed traders.

Source: Journal of Financial Economics

DOI: 10.1016/j.jfineco.2025.104155

Authors: Amit Goyal, Adam V. Reed, Esad Smajlbegovic, Amar Soebhag

Institutions: Swiss Finance Institute, University of Lausanne, Erasmus University Rotterdam, Nieuwegein Fonds

Language: English

Topic: Financial Markets and Investment Strategies

Subfield: Finance

Field: Economics, Econometrics and Finance

Domain: Social Sciences

Open Access status: hybrid

Estimated APC paid: $4,740

Funders: Erasmus Universiteit Rotterdam, Erasmus Research Institute of Management