Which Shorts Are Informed?
Which Shorts Are Informed?
Which Shorts Are Informed?
Ekkehart Boehmer
Mays Business School
Texas A&M University
Charles M. Jones
Graduate School of Business
Columbia University
Xiaoyan Zhang
Johnson Graduate School of Management
Cornell University
We construct a long daily panel of short sales using proprietary NYSE order data.
During 2000-2004, shorting accounts for more than 12.9% of NYSE volume, suggesting
that short-sale constraints are not widespread. As a group, these short sellers are quite
well-informed. Heavily shorted stocks underperform lightly shorted stocks by a risk-
adjusted average of 1.16% over the following 20 trading days (15.6% annualized).
Institutional non-program short sales are the most informative; stocks heavily shorted by
institutions underperform by 1.43% the next month (19.6% annualized). The results
indicate that, on average, short sellers are important contributors to efficient stock prices.
We are grateful to an anonymous referee, Yakov Amihud, Amy Edwards, Doug Diamond, Joel
Hasbrouck, Terry Hendershott, Owen Lamont, Mark Seasholes, Sorin Sorescu, Michela Verardo, Ingrid
Werner, and seminar participants at the 2006 American Finance Association Annual Meeting, BSI
Gamma Conference, Cornell, Dauphine, Goldman Sachs Asset Management, HEC, the London School of
Economics, the NBER Market Microstructure meeting, the NYSE, the Tinbergen Institute, the University
of Chicago, and the University of Lausanne for helpful comments. We thank the NYSE for providing
system order data.
Throughout the financial economics literature, short sellers occupy an exalted place in the
pantheon of investors as rational, informed market participants who act to keep prices in line.
Theoreticians often generate a divergence between prices and fundamentals by building models that
prohibit or constrain short sellers (e.g, Miller (1977), Harrison and Kreps (1978), Duffie, Garleanu, and
Pedersen (2002), and Hong, Scheinkman, and Xiong (2006)). Empirical evidence uniformly indicates
that when shorting constraints are relaxed, overvaluations become less severe, suggesting that short
sellers are moving prices toward fundamentals (examples include Lamont and Thaler (2003), Danielsen
and Sorescu (2001), Jones and Lamont (2002), Cohen, Diether, and Malloy (2005)). But there is
surprisingly little direct evidence that short sellers know what they are doing.
There is indirect evidence in the existing literature. For example, Aitken et al. (1998) show that
in Australia, where some short sales were immediately disclosed to the public, the reporting of a short
sale causes prices to decline immediately. Some authors (but not all) find that short interest predicts
future returns.1 Dechow et al. (2001) find that short sellers generate positive abnormal returns by
targeting companies that are overpriced based on fundamental ratios such as P/E and market-to-book.
In this paper, we provide direct evidence on the informativeness of short sales using a long panel
of all executed short sale orders submitted electronically to the New York Stock Exchange (NYSE).
First, we show that there is a surprisingly large amount of shorting activity across both large and small
NYSE stocks, which suggests that shorting constraints are not widespread. More importantly, we use
these data to explore directly whether short sellers are able to identify overvalued stocks and profit by
anticipating price declines in these stocks. We also have data identifying the type of trader initiating the
short. This allows us to determine which types of traders, if any, possess private information about equity
values.
1
For example, Brent, Morse, and Stice (1990) find that monthly short interest does not predict either the cross-
section or time-series behavior of returns, Asquith, Pathak, and Ritter (2004) find predictive power only in the
smallest stocks, while authors such as Asquith and Meulbroek (1996) and Desai et al. (2002) find more evidence of
predictive power in the cross-section. Lamont and Stein (2004) find that aggregate short interest is extrapolative,
reacting to past price moves, but has no predictive power for future market moves.
There are theoretical reasons to expect short sellers to be well informed. For example, Diamond
and Verrechia (1987) point out that since short sellers do not have use of the sale proceeds, market
participants never short for liquidity reasons, which would imply relatively few uninformed short sellers,
all else equal.2 But there can be a strong hedging motive that is unique to short sales. Naturally, some
short sellers take their positions based on fundamental information about a company’s valuation, either on
an absolute basis or relative to other firms. In contrast, convertible arbitrage hedge funds and options
market-makers might short a stock as part of their hedging strategy, with little thought to whether the
stock itself is over- or undervalued. Index arbitrageurs might long futures or some other basket
instrument and short the underlying stocks. Market-makers might short shares as a part of their regular
buffering activity. Some of these shorts are based on information or opinions about the firm’s share price
level; some are not. Thus, it seems important to distinguish between these different types of shorts.
Our data identify the type of customer initiating the short. These account type indicators are not
overly detailed, but they do distinguish between individuals, institutions, and member firm proprietary
trades, and we can tell if a short sale was executed as part of a program trade. This allows us to explore
which of these groups, if any, possess private information about equity values.
In the world of shorting, it is not obvious that institutions are better informed than individuals. It
is popular to regard individual stock trading as less informed and even irrational, and there is plenty of
supporting evidence. But few individual traders sell short, and those who do are likely to be the most
sophisticated, knowledgeable investors. It is also easy to imagine that at least some negative private
information is endowed (which is perhaps more likely for individuals) rather than acquired through costly
research (the likely avenue for institutions). As part of their regular job duties, certain individuals, such
as corporate insiders, suppliers, and the like, might simply know when things are not going well at a given
firm. Corporate insiders are forbidden from shorting their own stocks, but others are less restricted. And
even corporate insiders might take short positions in companies that are close substitutes. An airline
2
Brokerage firms and regulators require that the proceeds of a short sale plus an additional margin amount
(currently equal to 50% of the value of the position in the U.S.) must be kept on deposit in order to minimize the
broker’s potential losses in the event of a default by the short seller.
2
executive with negative information about the whole industry could easily profit from his information by
shorting his competitors’ stocks. With our data, we can for the first time compare the information
Most of the empirical data on short selling are about the price or quantity of shorting. The
clearest pecuniary cost is associated with the rebate rate, which has been studied by D’Avolio (2002),
Geczy, Musto, and Reed (2002), Jones and Lamont (2002), Ofek and Whitelaw (2003), Ofek, Richardson,
and Whitelaw (2004), and Cohen, Diether, and Malloy (2005). Quantity data are the other major type of
empirical data, and these quantities are almost always stock rather than flow data. The most common
sources for quantities in the U.S. are the monthly short interest reports of the major exchanges. As
mentioned earlier, the evidence is mixed on whether these individual stock short interest reports can be
Our data are also quantity measures, but of the flow of shorting rather than the stock of shorting.
This has a number of advantages. First of all, our data are much finer than traditional monthly short
interest data. We have the ability to examine daily or even intraday data on short sales. If many shorts
maintain their positions for only a short period of time, daily flow data may be an improvement over
coarse monthly short interest data. Jones (2004) provides evidence, albeit from the early 1930’s, that
short-lived shorts could be prevalent. During that period, shorting and covering on the same day – known
at the time as “in-and-out shorting” – averaged about 5% of total daily volume, and a much bigger (but
A second advantage of order level data is that we can identify many of the characteristics of
executed orders, such as the account type and order size. There are four different types of accounts:
individual, institution, member-firm proprietary, and other. The account type partitions are:
individuals.
3
Proprietary Orders where NYSE members are trading as
We further partition institutional and proprietary short sales depending on whether the order is part of a
program trade. A program trade is defined as simultaneous orders to trade 15 or more securities having
an aggregate total value of at least $1 million. There is some incentive for institutions to batch their
trades to qualify as a program trade, because program trades are often eligible for commission discounts
from brokers.
Account types are coded by the submitting broker-dealer based on a set of regulations issued by
the NYSE. While they are generally unaudited, these classifications are important to the NYSE and to
broker-dealers because they are required for a number of compliance issues. For example, NYSE Rule
80A suspends certain types of index arbitrage program trading on volatile trading days, and account type
classifications are important for enforcing this ban. The specialist and traders on the floor do not,
however, observe this account type indicator for an incoming system order. In general, these market
participants observe only the type, size, and limit price (if applicable) of an order. It is possible for the
specialist to research a particular order in real-time and obtain information about the submitting broker.
However, this takes a number of keystrokes and requires a certain amount of time, and given the pace of
trading on the exchange and our conversations with specialists, we conclude that this additional
In contrast, during our sample period the specialist is always aware that a particular system sell
order is a short sale. For compliance with the uptick rule, short sales must be marked, and during our
sample period software at the trading post flags every short sale order to help the specialist comply with
4
the uptick rule.3 Should the uptick rule become binding on an order to short sell, the display book
software enforces a limit price to comply with the uptick rule. This means that the specialist might be one
of the few market participants with an ability to incorporate this information into trading strategies,
though a specialist’s market-making obligations would constrain his ability to exploit this information
fully.
To our knowledge, we are the first academic researchers to partition short sales by account type.
NYSE account types have been used in a handful of other related papers. For example, Kaniel, Saar, and
Titman (2004) use NYSE account types to investigate investor sentiment, and Boehmer and Kelley
(2005) use account types to investigate the relationship between the informational efficiency of prices and
the amount of institutional trade. Other authors who study shorting flow data include Christophe, Ferri,
and Angel (2004), Daske, Richardson, and Tuna (2005), and Diether, Lee, and Werner (2005), but all
these panels are much shorter than ours and do not distinguish among different trader types.
We also observe other aspects of the short-sale order, notably the order size. In looking at all
trades, both Barclay and Warner (1993) and Chakravarty (2001) find that medium-size orders are the
most informed, which they label the stealth-trading hypothesis. When we look at large vs. small short
sale orders, we find somewhat different results. Like these earlier researchers, we find that small short
sale orders are on average uninformed, and medium-sized short sale orders of 500 to 5,000 shares are
more informed. In contrast to the stealth trading findings, however, we find that the largest short sale
orders (those of at least 5,000 shares) are the most informative about future price moves. Thus, it appears
that informed short sellers use larger orders than other informed traders.
3
During our sample period, the uptick rule applied to all stocks listed on the NYSE and AMEX. The rule applies to
most short sales and requires them to execute at a price that is either (a) higher than the last sale price (an uptick), or
(b) the same as the last sale price, if the most recent price change was positive (a zero-plus tick). Since May 2005
the uptick rule has been suspended for approximately one-third of NYSE stocks as part of Regulation SHO. Short
sale orders in these NYSE pilot stocks must still be marked by the submitting broker, but these are masked by the
NYSE’s display book software, which means the specialist and floor are unable to observe which sell orders are
shorts.
5
It is worth pointing out that there are two aspects of shorting flow we do not observe in our data.
First, we do not observe short covering in our dataset.4 We can see additions to short interest, but not the
subtractions, so we are unable to use our data to impute the level of short interest between the monthly
publication dates. Also, we do not observe all of the short sales that take place. We observe all short sale
orders that are submitted electronically or otherwise routed through the NYSE SuperDOT system. We do
not observe short sales that are manually executed on the NYSE trading floor by a floor broker. Also, we
do not observe short sales that take place away from the NYSE. Short sales executed on regional
exchanges, in the upstairs market, or offshore are not included in this sample, nor are shorts created
synthetically using total return swaps or other derivatives. Nevertheless, we believe that our sample
captures a substantial fraction of shorting activity, and our aim in this paper is to explore the
As stated above, we observe all short sale orders that are submitted to the NYSE trading floor via
electronic means. While we do not know exactly what fraction of total shorting is executed this way,
based on overall volume figures we do know that system order data capture a substantial fraction of
overall trading activity. According to the NYSE online fact book at nysedata.com, during 2002 shares
executed via the NYSE SuperDOT system are 70.5% of NYSE volume. If short sale orders are routed
and executed similarly, our sample would account for 70.5% of all short sales in 2002. Of course, we
cannot be sure that this is so. Given the uptick rule, short sellers may prefer the hands-on order
management of a floor broker. Short sales may also be executed in London or elsewhere outside the
The paper is structured as follows. Section 1 discusses the sample in more detail, both in terms of
overall shorting flow and the account type subdivisions. Section 2 examines the information in aggregate
shorting flow for the cross-section of future stock returns. Section 3 partitions shorting flow by account
type and by order size to see which kinds of short sales are most informative about the cross-section of
4
While it would be valuable to know when short positions are reversed, this information is not available to any US
market venue, because brokers are not required to disclose whether a buy order is intended to cover a short. In fact,
market venues only observe short sales in order to ensure compliance with short-sale price restrictions.
6
future returns. Section 4 conducts a number of additional robustness tests. One must be careful in
interpreting the empirical results, and this is the focus of Section 5. Section 6 concludes briefly.
The sample consists of all NYSE system order data records related to short sales from January
2000 through April 2004. We cross-match to CRSP and retain only common stocks, which means we
exclude securities such as warrants, preferred shares, American Depositary Receipts, closed-end funds,
and REITs.5 This leaves us a daily average of 1,239 NYSE-listed common stocks. For each trading day,
we aggregate all short sales in each stock that are subject to the uptick rule. A few short sales are exempt
from the uptick rule. These include relative-value trades between stocks and convertible securities,
arbitrage trades in the same security trading in New York vs. offshore markets, and short sales initiated by
broker-dealers at other market centers as a result of bona fide market-making activity. These exempt
short sales are marked separately in the system order data, and their share volume amounts to only 1.5%
of total shorting volume in our sample. We exclude these orders because they are less likely to reflect
We measure shorting flow three different ways. First, we simply count the number of executed
short sale orders in a given stock on a given day, regardless of size. Jones, Kaul, and Lipson (1994) find
that the number of trades, rather than total volume, is most closely associated with the magnitude of price
changes, and our use of the number of executed short sale orders is in the same spirit. Our second
measure is the total number of shares sold short in a given stock on a given day. Our final measure is the
fraction of volume executed on the NYSE in a given stock on a given day that involves a system short
seller.
5
Some care is required in matching stocks. NYSE data, including both SOD and TAQ, use the ticker symbol as the
primary identifier. However, ticker symbols are often reused, and ticker symbols in CRSP do not always match the
ticker symbols in NYSE data, especially for firms with multiple share classes. We use tickers and CUSIPs to ensure
accurate matching.
7
Table I Panels A and B provide summary statistics about overall shorting flow measures,
undifferentiated by account type. NYSE common stocks experience an average of 146 executed short-
sale orders in a given day, with a mean of 99,747 shares sold short via system orders per stock per day.
Note that a small number of stocks account for most of the shorting, as the median stock has 27,425
shares sold short daily and the 75th percentile of 95,417 shares per day is still below the mean.
One striking result is that during our sample period shorting via system orders averages 12.86%
of overall NYSE trading volume (equal-weighted across stocks). In fact, shorting via system orders
becomes more prevalent as our sample period progresses, accounting for more than 17.5% of NYSE
trading volume during the first four months of 2004. Recall that these are lower bounds on the incidence
of shorting at the NYSE, since our sample does not include specialist short sales or short sales that are
handled by a floor broker. Nevertheless, this number is somewhat surprising, since aggregate short
interest in NYSE stocks during 2004 is only 2.0% of shares outstanding. The short interest numbers
suggest that shorting is relatively uncommon, while the shorting flow numbers indicate that shorting is
quite pervasive. The dichotomy between these two numbers also means that short positions are on
average shorter-lived than long positions. To see this, note first that if shareholders are homogeneous (so
Di = 1 / Ti, (1)
where Di is the length of time between opening and unwinding a position in stock i, and Ti is the turnover
(shares traded / shares outstanding) in stock i. For example, if 1% of the shares trade each day, then it
takes 100 days for the entire stock of outstanding shares to turn over, and the average holding period is
100 days. Assuming a constant short interest and homogeneity, the same relationship holds for the subset
Duration of short positions = short interest in shares / shorting volume in shares (2)
8
In 2004, for example, based on aggregate data from the NYSE online fact book, aggregate short interest
averages 7.6 billion shares, while aggregate shorting volume totals 51.2 billion shares for the year, which
means that the average short position lasts 7.6 / 51.2 = 0.15 years, or about 37 trading days. In contrast,
the average duration for a long position is 1.20 years. The dichotomy is similar when we use our sample
of short sales instead of all short sales. These dramatic differences in duration suggest that short selling is
autocorrelations of our various daily shorting measures along with stock returns. Contemporaneous
correlations are calculated cross-sectionally each day, and time-series average correlations are reported.
All three shorting flow measures are positively correlated, with correlations ranging from 0.20 to 0.80.
The number of executed short sale orders and the number of shares sold short are the most strongly
positively correlated (ρ = 0.80). These measures are not standardized in any way, and so it is not
surprising that they are less strongly correlated with shorting’s share of total volume, which is
standardized. All the shorting measures are persistent, with average first-order daily autocorrelations
between 0.41 and 0.54.6 Finally, these simple correlations suggest that price increases attract informed
short sellers. While the magnitudes are small, the cross-sectional correlation is positive between shorting
activity in a stock and that stock’s return on the same or previous day, while the correlation with the next
day’s return is negative (and these correlations are statistically different from zero).
Panel C sorts stocks into 25 size and book-to-market portfolios and measures average shorting
activity within each portfolio. Most notable is shorting’s share of overall trading volume, at the bottom of
the panel. There are no strong patterns either across or down the panel, as the mean shorting share varies
only modestly from 10.5% to 15.2% of overall NYSE trading volume. Consistent with short interest data,
there is a bit less shorting of small firms, but even there shorting is quite prevalent. While there may still
be costs or impediments to short selling, these numbers suggest that many market participants are
6
Autocorrelations and cross-autocorrelations are calculated stock by stock, and the table reports cross-sectional
average autocorrelations and cross-autocorrelations.
9
overcoming these hurdles, even in the smallest NYSE stocks. It could be that these are inframarginal
short sales, and the constraints continue to bind for some market participants. But the pervasiveness of
shorting suggests that shorting constraints are not very severe, at least for stocks in the NYSE universe.
If short sellers are informed, the stocks they short heavily should underperform the stocks they
avoid shorting. A portfolio approach is a natural way to measure these cross-sectional differences (see
also Pan and Poteshman, 2006) and has several advantages. First, it is easy to interpret, because it
replicates the gross and/or risk-adjusted returns to a potential trading strategy, assuming
(counterfactually) that one could observe all these shorting flow data in real time. Second, compared to a
regression approach the aggregation into portfolios can reduce the impact of outliers. Finally, portfolios
are able to capture certain non-linearities that might characterize the relationship between shorting
Thus, in the time-honored asset pricing tradition, we begin by sorting stocks into portfolios based
on our shorting flow measures. Each day, we sort into quintiles based on shorting activity during the
previous five trading days. The four middle columns of Table II Panel A show how these sorts are
correlated with other stock characteristics that have been studied previously. Shorting activity is
positively correlated with trading volume, no matter how the shorting is measured. Shorting does not
seem to be strongly correlated with daily stock return volatility, however. The unstandardized shorting
measures (number of trades and shares sold short) are strongly positively correlated to size. This is
unsurprising, because large cap stocks simply have more shares outstanding, and one would expect more
trading and thus more shorting of these stocks. The standardized shorting measure (shorting’s share of
volume) has a more modest but opposite correlation to market cap. On average, large stocks tend to
experience light shorting by these measures. There is not much of a relationship between the shorting
flow measures and book-to-market ratios. As might be expected, a bit more shorting activity is found in
stocks that have high market values relative to book. For example, the quintile with the smallest number
10
of shares shorted has an average book-to-market ratio of 0.77, while the heavily shorted quintile has a
book-to-market ratio of 0.60. Average book-to-market differences are even smaller for shorting’s share
of overall trading volume. Thus, there is at best only weak evidence that short sellers target stocks with
high market-to-book as potentially overpriced. As one might expect, uncovering a mispriced stock
Throughout the paper, we follow the same general approach regardless of how stocks are
partitioned. After firms are sorted into quintiles each day, we skip one day (to eliminate any possibility
that prices for firms in a particular quintile are disproportionately at either the bid or the ask) and then
hold a value-weighted portfolio for 20 trading days. This process is repeated each trading day, so there
are overlapping 20-day holding period returns. To deal with this overlap, we use a calendar-time
approach to calculate average daily returns and conduct inference (see, among many examples, Jegadeesh
and Titman (1993) who apply this method to returns on momentum portfolios). Each trading day’s
portfolio return is the simple average of 20 different daily portfolio returns, and 1/20 of the portfolio is
rebalanced each day. To be precise, the daily return Rpt on portfolio p is given by:
20
R pt = 1
20 ∑Q
k =1
ip
t − k −5,t − k −1 wtip−1 Rit , (4)
where Qtip−k −5,t −k −1 is an indicator variable set to one if and only if the ith security is assigned to portfolio p
based on short-selling activity during the time interval [t–k–5, t–k–1], wtip−1 are market-value weights at
time t–1 (actually from the previous calendar month-end in this case) normalized such that
∑Q
i
ip
t − k −5 ,t − k −1 wtip−1 = 1 (5)
for each portfolio p, date t, and portfolio formation lag k, and Rit is the return on security i on date t.
Average daily calendar-time returns are reported in percent multiplied by 20 (to correspond to the
holding period and also so that the returns cover approximately one calendar month), with t-statistics
based on an i.i.d. daily time series. The Fama-French alpha on portfolio p is the intercept (scaled up by
The four right-most columns of Table II show these raw returns and alphas for each of the shorting
quintile portfolios. The basic result is that short sellers are well-informed over this horizon.7 Most
notable is the next month’s value-weighted return on heavily shorted stocks (quintile 5) vs. the return on
lightly shorted stocks (quintile 1). The raw returns on heavily shorted stocks are actually negative,
averaging -0.24% per month for those stocks with the most executed short sale orders. In contrast, the
corresponding portfolio of lightly shorted stocks experiences an average return of 2.55% over the next 20
trading days. These numbers suggest that short sellers are good at relative valuation, and are particularly
good at avoiding shorting undervalued stocks. However, short sellers are not necessarily identifying
stocks that are overvalued, since the alphas on the heavily shorted stocks are just about zero. This
suggests that perhaps it is better to think of short sellers as keeping prices in line rather than bringing
Looking at the return differences, heavily shorted stocks underperform lightly shorted stocks, no
matter what shorting measure is used. We focus on shorting’s share of overall trading volume, because
this measure is the most orthogonal to size, book-to-market, and trading activity, each of which has been
shown to be related to average returns. Even though we are sorting on a measure that is mostly
orthogonal to size and book-to-market characteristics, these portfolios could still have different exposures
to priced risks. On a risk-adjusted basis, the heavily shorted stocks underperform lightly shorted stocks
by an average of 1.16% per (20-day) month, or 15.64% annualized. Even though the sample is only 4 1/3
years long, the average return difference is highly statistically significant, with a t-statistic of 3.67.
Researchers have identified several characteristics that are associated with cross-sectional
differences in average returns. To confirm that shorting activity is not simply isomorphic to these
7
Shorting flow also contains information about future returns at other horizons, both shorter and longer than 20
trading days. In fact, it appears to take up to 60 trading days for all of the information contained in shorting flow to
be fully incorporated into prices. This is discussed further in Section 2.C.
12
previously documented regularities, we conduct double sorts based on some of these other characteristics
known to be associated with returns. Note that some of these other characteristics are not available at
high frequencies, so we first sort stocks into quintiles based on size, market-to-book, stock return
volatility, or turnover for the previous month. Within a characteristic quintile, we then sort a second time
into quintiles each day based on shorting flow over the past five trading days. The result is a set of stocks
that differ in shorting activity but have similar size, market-to-book, volatility, or turnover.
Again we skip a day, and value-weighted portfolio returns are calculated using a 20-day holding
period. We then roll forward one day and repeat the portfolio formation and return calculation process.
As before, we use a calendar-time approach to calculate returns and conduct inference, and Table III
reports the daily value-weighted risk-adjusted return difference (multiplied by 20) between the heavily
shorted and lightly shorted quintiles. Return differences are reported for each of the shorting activity
measures.
Table III Panel A controls for the firm’s market capitalization. The shorting effect is present
across all five size quintiles. The results are strongest for the smallest quintile, where heavily shorted
stocks underperform lightly shorted stocks by 2.20% to 3.33% per month. The shorts’ information
advantage in small stocks makes sense given the relative paucity of research coverage and other readily
available sources of information about these firms. Based on the evidence in Table I Panel C, even small
stocks experience significant shorting activity, so it is certainly possible for some investors to short these
stocks. However, small stocks may be expensive to short (see, for example, the evidence in Geczy,
Musto, and Reed (2002)), and it is important to remember that the return differences throughout this paper
do not account for any potential costs of shorting. In contrast to Diether, Lee, and Werner (2005), who
use a much shorter sample period, the shorting effect is also fairly strong for the large-cap quintile, with
excess returns between 0.74% and 1.16% per month, depending on the shorting measure. This is striking
because many so-called anomalies in finance do not appear in large-cap stocks, but the evidence here
indicates that short sellers as a group are earning substantial excess returns even on bellwether stocks.
We also perform a closely related double sort, first on institutional ownership (based on SEC 13f filings)
13
and then on shorting flow. We do not report these results in detail, but, in contrast to the short-interest
evidence in Asquith, Pathak, and Ritter (2005), heavily shorted stocks underperform lightly shorted
stocks across all institutional ownership quintiles. This provides additional evidence that shorts are
In Table III Panel B, we sort first by book-to-market and then by shorting activity. Our prior here
was that low book-to-market might be a necessary but not sufficient condition for a stock to be
overvalued. If true, then short sellers might further evaluate these stocks, identify those low book-to-
market stocks that are indeed overvalued, and short them heavily. If the short sellers are correct, these
This is partially borne out in the data. For stocks in the lowest book-to-market quintile, shorting
activity does have strong predictive power for the cross-section of returns in the following month. Stocks
with the most short sale transactions underperform those with the fewest orders by 1.52% per month.
Sorting by the number of shares shorted gives a return difference of 1.30% per month, and sorting by
shorting’s share of volume gives a return difference of 1.23%. All of these are economically large and
In contrast to our priors, shorting activity seems to predict next month’s returns across all book-
to-market quintiles, and in fact may be slightly stronger in the highest book-to-market quintile, where the
return difference is as high as 3.08% per month. For our preferred measure – shorting’s share of overall
volume – the excess return differences are quite similar across all five book-to-market quintiles, ranging
from 1.04% to 1.33% per month. We conclude from this that low book-to-market is neither a necessary
nor sufficient condition for a stock to be overvalued. It appears that short sellers are able to identify and
short overvalued stocks across the book-to-market spectrum, with stocks underperforming in the month
In Table III Panel C we control for individual stock return volatility. Ang, Hodrick, Xing, and
Zhang (2004) find that firms with volatile stock returns severely underperform on a risk-adjusted basis.
One might guess that the volatility effect might be related to our short-selling effect, if the volatility
14
reflects severe differences of opinion and thus heavy (and ex post informed) short selling. However, the
data indicate that the volatility effect does not chase out the return differences based on shorting activity.8
For both low volatility and high volatility firms, heavy shorting is an indicator of negative returns to come
in the following month. Still, the biggest effects are in the most volatile stocks, with return differences
between 1.87% and 4.55% per month. In these most volatile stocks, short sellers seem to be particularly
well-informed.
In Table III Panel D we examine the predictive power of shorting activity controlling for trading
volume. Brennan, Chordia, and Subrahmanyam (1998) and Lee and Swaminathan (2000) find that high-
volume firms underperform low-volume firms, which makes it important to rule out the possibility that
our shorting activity measures are simply reflecting overall trading activity. Indeed, shorting flow
strongly explains the cross-section of future returns regardless of the amount of overall turnover. Using
shorting’s share of trading volume as the second sort variable, return differences average 0.86% to 1.43%
per month across trading volume quintiles. This establishes that the shorting effect in this paper is
independent of the earlier volume regularity. Again, it is interesting to note that these excess returns are
also being earned in the most active stocks. In the most active quintile, the heavy shorting quintile
underperforms the light shorting quintile by as much as 1.81% per month. As discussed in the double
sorts with size, these results are striking, because anomalies in finance tend to be found in less active,
illiquid stocks. But it is important to remember that these return differences are not tradable and are
simply returns to private information, and there is no requirement that there be less private information
8
In results not reported, we also confirm that our shorting flow measures do not chase out the underperformance of
very volatile stocks. In addition, even the most volatile stocks are being shorted on a regular basis, which suggests
that short sale constraints cannot easily account for Ang et al.’s return findings.
15
2.C Short sales vs. other sales
Do short sellers trade on better or different information than regular sellers?9 As noted earlier,
Diamond and Verrechia (1987) observe that since short-sale proceeds cannot be used for consumption,
short sales are never undertaken for liquidity reasons, which means short sales should be more informed
than other sales, all else equal. Short sellers may also receive different types of signals about
fundamentals, in which case their trades would differ considerably from those of other informed sellers.
To investigate the differences between the two types of sellers, we compare our shorting activity
measures to signed order imbalances measured over the same time interval. We use order imbalances
(OIB) because they are also flow measures, and a recent line of research such as Chordia and
Subrahmanyam (2004) argues that order imbalances may be good proxies for the direction and intensity
of informed trading.
OIBs are calculated by identifying the side that initiates each trade using the Lee and Ready
(1991) algorithm. Trades that take place above the prevailing quote midpoint (or at the midpoint but at a
higher price than the previous trade) are assumed initiated by buyers, and the OIB is calculated as buyer-
initiated volume less seller-initiated volume.10 Using TAQ data, we calculate order imbalances for each
stock over the same 5-day horizon used to calculate the shorting activity measure, and normalize by the
total trading volume in the stock over the same period. We sort stocks first into quintiles based on OIB,
and then within each quintile we sort stocks into quintiles based on short selling activity.
The results are in Table III Panel E. Order imbalances have little effect on the predictive power
of shorting flow. When short sale flow is measured by the number of orders or number of shares, return
differences range from 1.33% to 1.98% per month across the various OIB quintiles. When short sale flow
is measured relative to overall volume, there is some evidence that short sales are not very informed when
OIB is most positive. However, even when OIB is most negative, short sale activity still seems to be
quite informed, with heavily shorted stocks underperforming lightly shorted stocks by an average of
9
We thank the referee for suggesting this investigation.
10
Note that short sales and OIB are not inherently correlated. Like all transactions, short sales are included in the
calculation of OIB. But due to the uptick rule, short sales are less likely to take place below the prevailing quote
midpoint than other sales, and are therefore less likely to be classified as seller-initiated for OIB purposes.
16
1.89% over the following month. Thus, it appears that the information possessed by short sellers is
The disadvantage of double sorts is that it is only possible to control for one other characteristic at
a time. To control simultaneously for multiple characteristics, we adopt a regression approach based on
Fama and MacBeth (1973). Each day, we run cross-sectional predictive regressions including the
shorting activity measure as well as firm and/or stock characteristics. There is one cross-sectional
regression per day, and the shorting activity variable is again calculated by averaging shorting over the
previous five days. The dependent variable is the raw or risk-adjusted return over the next 20 trading
days, again skipping one day after measuring shorting activity. Risk-adjusted returns are calculated using
the Fama and French (1993) three-factor model using the previous calendar quarter of daily data to
estimate factor loadings for each stock. We use a Fama-MacBeth approach to conduct inference, with
Newey-West standard errors (using 20 lags) to account for the resulting overlap. Rather than continue to
report similar results for the three different shorting activity measures, from now on we use shorting’s
share of trading volume, which as discussed earlier is the most orthogonal of our shorting measures to
size, book-to-market, and trading activity variables that have been previously studied. In addition, each
day we standardize the cross-sectional distribution of our explanatory variables to have zero mean and
unit standard deviation. Shorting becomes somewhat more prevalent as our sample period progresses, so
this normalization is designed to mitigate the effects of any trend that might otherwise affect inference in
The results are in Table IV. The effect of the shorting flow measure is virtually the same using
raw or risk-adjusted returns, so only the Fama-French alphas are discussed. We begin with a benchmark
simple regression of future returns on shorting activity. In the cross-section, a one standard deviation
increase in shorting activity results in risk-adjusted returns over the next 20 days that are 0.53% lower, on
average. The confidence interval on this estimate is quite small, with a t-statistic greater than 10. The
17
shorting results are virtually unchanged when we include standardized characteristic controls, including
size, book-to-market, and turnover, as well as volatility and returns over the previous month.
The third specification in the table also includes order imbalances as explanatory variables. As
discussed in the previous section, the idea is to investigate whether short selling is any different from
other selling in terms of ability to predict the future cross-section of returns. Here we allow buy
imbalances and sell imbalances to have different effects based on results in the order imbalance literature.
Specifically, we calculate as the fraction of volume initiated by buyers less the fraction of volume
initiated by sellers and standardize the variable to have unit cross-sectional standard deviation each day.
The positive imbalance variable is defined as max(0, OIB), while the negative imbalance variable is
defined as min(0,OIB).
What is the right null for this regression? If markets are efficient with respect to all publicly
available information, the coefficients on OIB and shorting flow should in fact be different. Because
order imbalances are identified using publicly available trade and quote data, OIB can be observed
essentially in real time. As a result, prices should be efficient with respect to OIBs, and OIBs should not
predict future returns. In contrast, short sales are not publicly observed, so short sale flow can be related
The regression results in Table IV indicate that negative order imbalances are informative about
the future cross-section of returns, but in the opposite direction to our short sale flow data. The negative
sign on negative OIB indicates a reversal over the next 20 days, consistent with the inventory-effect
interpretation in Chordia, Roll, and Subrahmanyam (2004). That is, following heavy seller-initiated
trading, prices tend to rebound. Specifically, when negative order imbalances get larger (more negative)
by one standard deviation, returns are a statistically significant 0.53% higher in the next month. In
contrast, in the 20 days following heavy short selling, prices fall, and the coefficient on shorting flow is
virtually unchanged by the inclusion of the order imbalance variables. This indicates that the information
in short sales is quite distinct from the information that gives rise to sell order imbalances.
18
3. Trading by different account types
We now turn to the question asked in the title of the paper. System short sales on the NYSE can
be partitioned into six different account types: individual, institutional (program and non-program),
member-firm proprietary (program and non-program), and other. What might we expect going into the
exercise? As noted in the introduction, it is not obvious that individual shorts would be less informed
than institutional or member-firm proprietary shorts. It is also hard to know what to expect for program
vs. non-program trades. As mentioned earlier, program trades are defined as simultaneous trades in 15 or
more stocks worth at least $1 million. One well-known type of program trade is index arbitrage, which
involves trading baskets of stocks when they become slightly cheap or dear relative to index derivatives
such as futures. Index arbitrage short positions seem unlikely to contain any information about the cross-
section. However, hedge funds and other institutions often use program trades to quickly and cheaply
trade a large number of names, since the commission rate is often lower for computerized program trades.
Such program trades often mix buys and sells together. Clearly, in such cases the hedge funds believe
they have private information about the cross-section that is not yet incorporated into price. Our priors
about proprietary trades are also fairly diffuse. If these proprietary trading desks are mostly acting as
market-makers, they are likely to be uninformed over the longer term about fundamentals.11 However,
proprietary trading desks often trade like hedge funds, and one might expect those shorts to be more
informed.
Table V Panel A helps to provide some sense of the distribution of shorting across account types.
Shorting by individuals on the NYSE is fairly rare, as they tend to account for 1% to 2% of overall
shorting volume. This is not peculiar to shorting; overall NYSE order flow exhibits similar patterns (see,
for example, Jones and Lipson, 2004). Part of the explanation is that individuals account for only a small
amount of overall trading volume. But part of this paucity of individual orders is due to the brokerage
routing decision. Many, if not most, brokerage firms either internalize retail orders in active stocks or
11
Member-firm proprietary desks can supply liquidity without competing directly with the specialist. For example, a
block desk may purchase a large block of stock from a customer early in the day (in the upstairs market) and then
proceed to gradually trade out of the position on the exchange floor.
19
route these orders to regional exchanges or third-market dealers in return for payment. As a result, very
few orders from individuals make their way to the NYSE. Institutions submit most short sale orders, and
account for about 74% of the total shares shorted via system orders. Member-firm proprietary shorts
represent about 20% of total shorting. Somewhat surprisingly, if we slice firms by market cap, volatility,
or prior return, there is not much variation in these fractions of overall shorting volume.
To investigate the information in short sales by different account types, we begin again with a
sorting approach. Each day, stocks are sorted into quintiles based on shorting’s share of trading volume
by the specified account type over the previous five days. Returns are calculated for each of these five
value-weighted portfolios, and the focus continues to be on the daily return difference between the heavy
shorting quintile and the light shorting quintile. Calendar-time differences in Fama-French alphas are
calculated for holding periods from 10 to 60 trading days. Reported alphas are daily values in percent and
The results are detailed in Table V, beginning in Panel B. For comparison to earlier results, we
focus first on 20-day holding periods. Recall for comparison that using aggregate shorting by all account
types, the heavy shorting quintile underperforms the light shorting quintile by a cumulative 1.16% over
20 trading days, and this underperformance is strongly statistically distinct from zero, with a t-statistic of
3.67.
Next we look at short sales initiated by various account types, with the results also reported in
Table V Panel B. Institutions and member-firm proprietary short sales that are not part of a program trade
are the most informed. Over a 20-day holding period, stocks with heavy shorting by institutions
underperform the light shorting quintile by a significant 1.43%, which is 19.6% annualized. The
corresponding figure for member-firm proprietary non-program shorts is 1.34% or 18.3% annualized, and
both return differences are statistically quite different from zero. The non-program institutional and
proprietary alphas are not statistically distinguishable from each other, but they are reliably more
20
informed than all other account types. In fact, we cannot reject the hypothesis that short sales by other
account types (individual, institutional and proprietary program trades, and other accounts) are completely
uninformed, as none of the alphas are statistically different from zero. For example, the quintile of stocks
most heavily shorted by individuals underperforms the light shorting quintile by only 0.14% over the next
month.
One might worry that these negative relative returns are only temporary, with reversals at longer
horizons. Among other things, such reversals could indicate manipulation by short sellers or overreaction
by other market participants to the presence of short sales. To investigate, we look at holding periods of
10, 20, 40, and 60 trading days. We continue to skip one day between measuring short sales and
calculating holding period returns. Daily alphas are computed using a calendar-time approach but are
reported scaled up by 20 (to reflect a monthly return) regardless of the actual holding period. We focus
on institutional and proprietary non-program shorts, which are the only short sellers that are reliably
informed. Table V Panel B shows that heavily shorted stocks experience the biggest underperformance in
the first 10 days. Using institutional non-program shorts as an example, the 10-day relative alpha is -
1.13%, and on average repeating the strategy over the next ten days yields a 20-day relative alpha of -
2.27% (the number in the table). This is bigger in magnitude than the 20-day holding period alpha of -
1.43%. While the alphas are closer to zero with longer holding periods, it is still the case that heavily
shorted stocks continue to underperform for at least 60 days. Figure 1 shows the daily evolution of these
excess returns up to 60 days. Here the alphas are not monthly but instead correspond to the holding
period. Cumulative excess returns tend to flatten slightly at the longer horizons, suggesting that more of
the information possessed by short sellers is impounded into price in the first few trading days, but some
information possessed by short sellers is impounded into price over longer horizons, with short sale flow
remaining informative even three months later. Thus, while much of the information in short sales seems
to be shorter-lived than one month, some of the information takes up to 60 trading days to find its way
21
Much of the 2000-2004 sample period is characterized by a substantial and extended market
decline. One might wonder if the predictive power of shorting flow is most valuable in a declining
market. Figure 2 addresses this question, and more generally shows the profits and losses over time from
this hypothetical “trading strategy.” Specifically, it shows the raw return differences between the heavy
shorting and light shorting quintiles for each month of the 20-day holding period calendar-time strategy,
based on shorting relative to trading volume. Considering all shorting activity, heavily shorted stocks
underperform lightly shorted stocks in about two-thirds of the months, and the results are fairly consistent
throughout the sample. For institutional short-sellers, the worst month is March 2002, when heavily
shorted stocks actually outperform lightly shorted stocks by 2.20%. Their best month is January 2001,
when heavily shorted stocks underperform lightly shorted stocks by 9.30%. Overall, the low standard
deviation of 2.27% per month for relative returns means a great deal of statistical power against the null,
even though the sample is only a bit more than four years long. The results are similar when quintiles are
assigned using all shorting or non-program proprietary shorting activity. These graphs are similar to
those for many tradable regularities, with favorable return differentials in many but by no means all
months. We also checked formally whether the results were different across calendar years and found no
evidence of nonstationarity.
Our sample period was also characterized by a number of high-profile frauds and collapses,
including Enron, Worldcom, and Adelphia, among others. Worldcom and Adelphia are not in our sample
because they were listed on Nasdaq. But one might worry that the results are being driven by a small
number of extreme observations where short sellers made the bulk of their profits. This is not the case;
the results are not driven by a small number of outliers. When we exclude firms in the far left tail of the
holding period return distribution (the worst 1% or 5%), the magnitudes of underperformance are
naturally slightly reduced, but the qualitative results are unchanged. The remaining 95% or 99% of stocks
We also confirm that the results are not driven by the bursting of the so-called “tech bubble”, with
sharp declines in technology firm stock prices. Note that the sample is already limited to NYSE firms and
22
excludes the vast majority of technology stocks which are listed on Nasdaq. We partition the sample into
tech vs. non-tech firms using the SIC codes in Loughran and Ritter (2004) and recalculate return
differences based on shorting activity. There is no evidence that the results are driven by technology
stocks. For some shorting measures, the return differences are bigger for tech firms, and for other
shorting measures, the return differences are smaller. More importantly, for non-tech firms the difference
in Fama-French alphas between heavily shorted and lightly shorted stocks is always significant and bigger
An important question is how the information possessed by these short sellers gets into price.
One possibility is that the market is looking carefully for evidence of shorting in order to copy their
trading behavior. This is consistent with the data in Aitken et al. (1998), where the disclosure of a short
sale on the tape in Australia led to an immediate decline in price. The corresponding disclosure in the US
is monthly short interest, so one might guess that once short interest is published, prices react to the
surprise changes in short interest. To determine whether this accounts for our return differences, we
identified the short interest release date each month during our sample and excluded it from the portfolio
holding period. The results are in Table V Panel C, and excluding the short interest release date makes
virtually no difference in the measured underperformance of heavily shorted stocks. Whatever the nature
of the information possessed by short sellers, the release of short interest does not appear to be an
We next look at shorting by account type in a regression framework. As in Section 2, this allows
us to control for various stock or firm characteristics all at once. It also allows us to simultaneously
compare short selling across account types. Based on the simple sorts, non-program shorting by
institutions contains the most information about the cross-section of future stock returns. But shorting by
short sellers of various account types are acting on similar information. Perhaps there is a common factor
23
describing this shorting behavior, in which case it is enough to look at institutional shorting alone.
Alternatively, perhaps other account types are shorting based on orthogonal sources of information about
share price. For example, institutions may be trading based on fundamental information, while member
firm proprietary trading desks may be trading based on their knowledge of order flow in a stock. These
types’ shorting contributes incremental explanatory power for future returns. There is one cross-sectional
regression per day, and like all other tests in the paper it uses five days’ worth of shorting information.
The dependent variable is the return over the next 20 trading days. We use a Fama-MacBeth approach to
conduct inference, with Newey-West standard errors with 20 lags to account for the overlap in holding
period returns. As before, each explanatory variable is standardized to have cross-sectional mean zero
The results are in Table VI, and here we find some evidence that program trades are also
informed. When we include one account type at a time, controlling for other firm characteristics and
order imbalances, more short selling by each account type except individuals implies reliably lower
returns over the next 20 days. Heavy shorting by individuals is the exception and does not seem to be
When all six account types are put into the regression at the same time, both types of member-
firm proprietary shorts become insignificant. Institutional shorting, both program and non-program, are
the only short sales with incremental explanatory power for the cross-section of returns next month. This
is somewhat surprising, since proprietary and other account types showed strong univariate predictive
power. It suggests that shorting by these account types is correlated with institutional shorting, but the
institutional shorting dominates in terms of information content. The magnitude of the coefficient
estimates confirms the superior informativeness of non-program institutional shorting, as all else equal a
one standard deviation cross-sectional increase in non-program institutional shorting implies an average
24
Coefficients on the control variables generally have the same sign as in Table IV, except that
positive OIB now significantly lowers future returns in most models. Negative OIB remains significantly
negative; and order imbalances in both directions are associated with subsequent return reversals. But as
before, controlling for order imbalances leaves the predictive ability of shorting intact. In fact, adding the
two OIB variables to the model leaves the estimated coefficients on shorting and their standard errors
essentially unchanged. This suggests that whatever influence order imbalances have on subsequent
returns, their effect is small and largely orthogonal to that of shorting. Finally, we have also run these
regressions with various subsets of control variables and the results are the same.
Because we can observe individual short sale orders in every NYSE stock, it becomes possible to
look at the informativeness of large short sales vs. small short sales. Our prior was that small short sales
would be uninformed. In fact, the stealth trading results of Barclay and Warner (1993) and Chakravarty
Short sale orders are partitioned into five order size categories: less than 500 shares, 500 to 1,999
shares, 2,000 to 4,999 shares, 5,000 to 9,999 shares, and orders of at least 10,000 shares. By coincidence
it turns out that the median short sale order size is exactly 500 shares. Larger orders are less common:
31% of short sale orders are between 500 and 1,999 shares, 10% are between 2,000 and 4,999 shares, 5%
are between 5,000 and 9,999 shares, and only 4% are for 10,000 shares or more.
Table VII Panel A reports some summary statistics on the mix of order sizes across account
types. The average institutional short sale order is 550 shares if part of a program trade and 743 shares
otherwise. There is an even bigger differential for proprietary trades: the average size is 398 shares for
shorts that are part of a program trade, and 729 shares for non-program shorts. Interestingly, both
individual and other account type shorts tend to be larger on average. The average individual short is 820
shares, while the average short from the “other” account type is 1,015 shares.
25
Some researchers partition by trade size and argue that large trades are institutional, while small
trades are retail. Table VII Panel A shows that, at least for short sales, this is an unwarranted
generalization. Individuals account for only 1% of the short sale orders less than 500 shares and account
for at most 2% of the short sale orders in other order size categories. The vast majority of all shorting is
non-retail, and this is true for all order sizes. Program trades account for 45% of short sales less than 500
shares, but only 10% of short sales orders for 10,000 shares or more. Finally, it is worth noting that the
“other” account type submits a disproportionate number of large short sale orders. While this account
type is responsible for only 7% to 9% of the orders under 5,000 shares, it accounts for 31% of the
We use a double sort method to investigate large and small short sales separately. Each day, we
first sort stocks into quintiles based on shorting activity over the past five days, with shorting activity
measured as shorting’s fraction of overall trading volume in that stock. Within a quintile, we then sort a
second time into quintiles based on the fraction of that stock’s short sale orders that are of a given size.
The result is a set of stocks with similar overall shorting activity but different shorting activity at a given
order size. We repeat this exercise for four order size categories. There are so few short sale orders of
10,000 shares or more that the sorts do not work well, so we combine the two biggest order size
categories into a single category covering short sales of at least 5,000 shares.
For each order size category, value-weighted returns and Fama-French alphas are calculated for a
20-day holding period using the calendar-time approach and are reported in Panels B and C of Table VII.
Return differences are calculated as the return on the quintile with the most shorts in a given size bucket
minus the return on the quintile with the least prevalent shorts in a given size bucket. This number is
An example may help to sort out the two sorts. Suppose we want to investigate the
informativeness of small short sales. First sort stocks based on shorting’s share of trading volume over
the past five days, and consider for example the lowest quintile, which consist of lightly shorted stocks.
For each stock in this quintile, calculate the fraction of its short sale orders that are for less than 500
26
shares. Sort a second time into quintiles based on this small order fraction. Now calculate value-
weighted returns over the next 20 days for the sub-quintile with the most small short sale orders vs. the
sub-quintile with the fewest small short sale orders and compute the difference. In our example, Table
VII Panel C gives the Fama-French alpha on this return difference as 0.69%. That is, among stocks with
the least overall shorting activity, stocks with many small short sale orders actually outperform stocks
with few small short sale orders by 0.69% over the next month, though this number is not statistically
Nevertheless, this result is quite striking, because small short sales are worse than uninformed. In
fact, they seem to appear at exactly the wrong times, and one shouldn’t follow these small shorts at all. If
one could identify and instead buy the stocks where shorting is dominated by small orders, these would
outperform stocks where small short sales are less prevalent. In fact, this result holds across this entire
row of the table regardless of overall shorting activity, with 20-day average returns between 0.50% and
0.96%.
In contrast, when large short sale orders dominate the mix, stocks tend to underperform. The
results are fairly weak for short sales between 2,000 and 5,000 shares. Stocks with heavy shorting in this
size bucket underperform by 0.52% to 0.93% over the next 20 days, and the numbers are only sometimes
significantly different from zero. The numbers are strongest for the biggest short sale orders. When
orders to short at least 5,000 shares are most prevalent, the stock underperforms by a risk-adjusted
average of 1.13% to 2.03% in the following month. While not all of these are distinguishable from zero,
there is a consistent monotonic relationship between short sale order size and informativeness, indicating
that short sellers who choose to submit large orders on average are better informed about future stock
price moves.
Perhaps this is not surprising. The better a trader’s information, the more she should want to
trade. But this is not the usual result in the literature on the informativeness of different order sizes.
Earlier stealth trading results, which are calculated using all buys and sells rather than just short sales,
come to different conclusions. The results on small short sales are similar: they appear to be completely
27
uninformed. The stealth trading results would suggest that medium-sized shorts contain the most
information. But we find that the information in short sales is monotonic in order size. The larger the
short sale, the more informative it is about future price moves. In contrast to the stealth trading results,
the biggest short sales of over 5,000 shares appear to have the biggest ability to predict future price
moves.
While we are not sure why this is so, one possibility is that these short sellers possess short-term
information and cannot afford to be patient in executing their orders. Another possible explanation is that
the uptick rule might inhibit the kind of slicing and dicing that we see on many other institutional orders.
If the uptick rule reduces the probability of getting an order executed, perhaps short sellers cannot afford
the execution uncertainty associated with splitting orders and submit large orders instead. If this second
explanation is true, we might see this result change for those stocks that become exempt from the uptick
rule during the Regulation SHO pilot program currently being conducted by the SEC.
Most of the existing literature on the informativeness of short sales uses monthly short interest
data, and there is some evidence that monthly short interest can predict the future cross-section of returns.
One might worry that our shorting measures are highly collinear with monthly changes in short interest,
with little additional information provided by the higher frequency intermediate flows. Certainly our
shorting flow measures are correlated with monthly changes in short interest, because they are a
component of that monthly change. The monthly change in short interest is the sum of shares shorted in
our sample over the relevant days plus manual NYSE short sales plus off-NYSE short sales less all
covering transactions. The null hypothesis is that the monthly changes in short interest are sufficient to
To investigate this, we use a double sort method. The first sort is based on monthly short interest
changes for the previous month, in shares. The second sort is based on one of the three shorting flow
measures for the past five days. As before, the portfolio holding period is 20 days, and we calculate a
28
new set of portfolios and holding period returns for each trading day. The results are in Table VIII Panel
A, and they show the difference in value-weighted cumulative 20-day Fama-French alphas following
heavy vs. light shorting. Short interest does not drive out the shorting flow measures. For instance, using
shorting normalized by trading volume, heavily shorted stocks underperform lightly shorted stocks by
0.96% to 1.60% per month across the short interest quintiles, with all five values statistically different
from zero.
In Table VIII Panel B, we reverse the sorting order to see if our shorting flow measure drives out
the predictive value of short interest. First we sort on our shorting flow measure, and then we sort on
changes in short interest and examine future returns on stocks with the biggest increases in short interest
vs. the biggest decreases. In 13 of 15 cases, the shorting flow measures drive out short interest. That is,
once we control for shorting flow, changes in short interest are no longer significant predictors of the
future cross-section of returns. This indicates that our measures dominate short interest as a proxy for the
Before the reader begins to raise money for a hedge fund trading on these return differentials, it is
important to emphasize again that these shorting flow measures are not publicly observable, which means
that these excess returns are not achievable. Instead, these return differences should be viewed as
indications of the returns to private information possessed by shorts in aggregate. They are indications
because we do not observe the entire trading history of short-sellers. We would be able to calculate exact
excess returns to a class of short sellers only if we knew all of the shorts and all of the covering trades.
As it stands, the returns reported here are the gross returns available to a hypothetical bystander who
observes system shorting flow in all stocks and trades in a particular way thereafter.
As discussed earlier, some market participants may be able to see pieces of this flow. The NYSE
specialist can observe the short-selling system order flow, though only in the small number of stocks that
he trades. The specialist may have some ability to shade his trading accordingly, but the market-making
29
requirements for specialists probably limit the ability to profit from this information. Brokerage firms
obviously observe the part of the shorting flow that they handle, and they could use that information to
copy their customers’ shorts if they believe that their customers are informed. But the complete flow data
for this sample period are observable only to the econometrician, and only after the fact.
We also want to reiterate that all of the returns reported here are gross returns, because frictions
are completely ignored. Even if a market participant could observe the short sale flow information, she
might not be able to locate shares to borrow for shorting, and even if she could locate shares, borrowing
those shares might be expensive for some stocks. Both of these frictions would reduce her returns. We
do not have data on the cost of borrowing individual stocks, because major share lenders, such as
brokerage firms and custodians, consider these data highly proprietary. However, aggregated across a
broad portfolio of stocks, other researchers with access to these data find that institutions do not generally
face a large pecuniary cost for borrowing shares. Only a small number of individual stocks carry negative
rebate rates, and a broad portfolio of stocks might cost 1% per year to short, which is far lower than the
magnitude of the excess returns to private information reported here. Of course, lending fees would be
increasing in the amount borrowed, so there could be scale limits for an institutional trader making use of
these shorting flow data. Individuals generally find it more expensive to borrow shares. Most brokers
pay no interest to individuals on their short sale proceeds, which means that individuals face an
opportunity cost on their short sales equal to the short-term riskless rate.
There are other costs associated with short sales that are harder to measure. For example, the
share lender can terminate the loan at any time, demanding the return of the shares. If this happens, the
share borrower must either find another share lender or close out the short position by purchasing the
required shares in the open market. This is known as recall risk. It is a particular concern of those who
short inactively traded, closely held, or otherwise difficult to borrow stocks, because a recall may force
the short seller to close the position at an unfavorable price. Such recalls seem to be fairly rare for NYSE
stocks, but we are unaware of any data quantifying the effect, if any, on short sellers. Additional costs are
associated with the collateral required to initiate and maintain a short position. In the United States,
30
Federal Reserve margin requirements require a short seller to deposit with its broker the proceeds of the
short sale plus collateral equal to 50% of the value of the shares sold short. The short seller continues to
earn interest or dividends on the posted collateral, so the main cost is that this collateral cannot be pledged
So far, we have also ignored run-of-the-mill trading costs. The implicit trading strategies
considered here have a holding period of 20 trading days, so it is possible for the whole portfolio to turn
over every month. It turns out that there is considerable persistence in shorting activity, and the
persistence is virtually identical whether we consider all shorting activity as a fraction of trading volume
or just non-program institutional shorting. In either case, when the portfolio is rebalanced at the end of 20
days, on average 35% of the stocks remain in the same extreme portfolio, and the other 65% must be
liquidated. Using NYSE TAQ data, we calculate the average effective spread for each stock each day and
assume that a trader must pay the effective half-spread in order to accumulate or liquidate a position. The
returns net of transaction costs are naturally a bit lower, but are still far from zero. For non-program
institutional shorting, heavily shorted stocks underperform lightly shorted stocks by 1.13% per month net
of trading costs, compared to 1.43% per month on a gross basis. That is, trading costs subtract a total of
about 30 basis points per month. These trading costs may seem quite small, but trading costs have fallen
substantially in recent years with the advent of decimals and increased competition between liquidity
providers. In reality, these trading costs may actually be slightly overstated on the short side. The uptick
rule implicitly forces short sellers to be less aggressive in demanding liquidity, which reduces realized
trading costs. However, the uptick rule may increase opportunity costs for short positions that end up not
being taken or are initiated with a delay. Overall, share borrowing costs and trading costs appear to be far
6. Conclusion
In this paper, we use proprietary system order data from the New York Stock Exchange to
examine the incidence and information content of all short sales and various subsets. There are two
31
striking results. First, short selling is quite common. Shorting accounts for 12.9% of trading volume on
average during our 2000-2004 sample period, and we conclude from this surprising prevalence that unless
the marginal investor is very different from the average investor, shorting constraints are easily
The second and main result is that these short sellers are extremely well-informed. We quantify
this information content in a number of different ways. Perhaps the simplest is a portfolio sorted into
quintiles based on one week’s shorting activity. Over the next 20 trading days, a value-weighted portfolio
of heavily shorted stocks underperforms lightly shorted stocks by a cumulative 1.16% on average on a
risk-adjusted basis (15.6% annualized). Of the six account types present in the data – individual,
institutional (program and non-program), member-firm proprietary (program and non-program), and other
– non-program institutional shorts are the most informed. Compared to stocks that are lightly shorted by
institutions, the quintile of stocks most heavily shorted by institutions in a given week underperforms by
1.43% over the next 20 trading days (more than 19.6% on an annualized basis). These alphas do not
account for the cost of shorting, and they cannot be achieved by outsiders, because the internal NYSE
data that we use are not generally available to market participants. But these gross excess returns to
shorting indicate that institutional short sellers have identified and acted on important value-relevant
information that has not yet been impounded into price. The price effects are permanent, which suggests
that short sellers are not manipulating or otherwise temporarily depressing the share price. The results are
strongly consistent with the emerging consensus in financial economics that short sellers possess
important information, and that their trades are important contributors to more efficient stock prices.
In future work, we are interested in understanding more about the source of the underperformance
in heavily shorted stocks. There is some evidence that short sellers possess information about
fundamentals. For example, Christophe, Ferri, and Angel (2004) find that negative earnings surprises are
preceded by abnormal short selling. Francis, Venkatachalam, and Zhang (2005) show that short sellers
are able to predict downward analyst forecast revisions, while Desai, Krishnamurthy, and Venkataraman
(2006) find that short sellers are able to anticipate earnings restatements. However, Daske, Richardson,
32
and Tuna (2005) do not find that short sellers anticipate negative earnings shocks. We think this is a
promising area of research, and our high frequency data are ideal for investigating short selling
33
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37
Table I. Summary statistics
The sample consists of all common stocks listed on the NYSE and extends from January 2000
through April 2004. Shorting’s share of volume (sfrac) is shares sold short on a given day as a
percentage of NYSE trading volume in that stock on that day. All shorting is aggregated per
stock per day. Reported figures are time-series averages of cross-sectional statistics, except for
the right half of Panel B, which reports cross-sectional averages of stock-by-stock
autocorrelations and cross-autocorrelations. In Panel B, correlations different from zero at
p=0.05 are given in bold.
Number of
executed short Shares sold Shorting share
sale orders short of volume
(orders) (shares) (sfrac)
Mean 146 99,747 12.86%
Cross-sectional Std Dev 194 232,541 10.59%
25% 23 6,331 4.90%
50% 77 27,425 10.27%
75% 192 95,417 18.10%
Avg. number of stocks 1,239 1,239 1,239
Panel B: Correlations and autocorrelations between returns and system shorting measures
size
B/M small 2 3 4 big
Daily shares sold short
low 16,722 33,722 55,648 115,378 341,726
2 16,201 28,523 49,568 114,064 341,813
3 12,065 23,143 55,611 111,969 293,845
4 10,413 23,455 56,070 121,150 265,750
high 14,779 39,875 94,559 171,220 336,642
Shorting’s share of trading volume
low 11.6% 14.0% 15.1% 15.2% 12.7%
2 11.8% 14.3% 15.2% 15.0% 13.0%
3 11.4% 13.6% 15.1% 15.1% 13.6%
4 10.7% 13.4% 14.9% 15.1% 14.5%
high 10.5% 14.0% 15.1% 14.5% 13.3%
38
Table II. Portfolios based on recent system shorting
The sample consists of all common stocks listed on the NYSE and extends from January 2000 through April 2004. Firms are sorted into
quintiles based on the specified short-selling activity measure over five trading days. After skipping one day, value-weighted portfolios
are held for 20 trading days. This process is repeated each trading day, so that each trading day’s portfolio return is an average of 20
different portfolios, with 1/20 of the portfolio rebalanced each day. Daily calendar-time returns and Fama-French three factor alphas are
reported in percent multiplied by 20 to reflect an approximately monthly return, with t-statistics based on the daily time series.
39
Table III. Return differences on short-sale portfolios after controlling for characteristics
The sample consists of all common stocks listed on the NYSE and extends from January 2000 through April 2004.
Firms are first sorted into quintiles based on the given characteristic. Within each quintile, firms are then sorted
into quintiles based on the short-selling measure for the past five days. Daily value-weighted returns are
calculated using a calendar-time approach with a holding period of 20 trading days. Daily Fama-French three
factor alphas are given in percent, multiplied by 20, for the return on the quintile with heavy short selling less the
return on the quintile with light short selling. In Panel E, the order imbalance is calculated using Lee and Ready
(1991) and is the share of volume initiated by buyers less the share volume initiated by sellers, normalized by
total volume. This variable is calculated over the same 5-day interval as the shorting measure.
Panel C: First sort is return volatility Panel D: First sort is share turnover
low 2 3 4 high low 2 3 4 high
Second sort: number of executed short sale orders
pf5 – pf1 -1.10 -1.77 -1.62 -2.27 -4.55 -2.62 -2.19 -1.48 -2.30 -1.81
t-stat -2.58 -4.13 -3.50 -4.53 -5.82 -5.76 -5.93 -3.49 -4.44 -2.85
40
Table IV. Cross-sectional return regressions with controls
Fama-MacBeth regressions of daily observations for all common stocks listed on the NYSE, Jan 2000 through Apr 2004. The
dependent variable is the cumulative return or Fama-French three-factor alpha over the following 20 trading days. Shorting share is
defined as shares sold short as a percentage of NYSE volume in that stock over the previous five trading days. Size, book-to-market,
return volatility, and turnover are calculated using data from the previous calendar month. Order imbalance is calculated using Lee
and Ready (1991) and is the share of volume initiated by buyers less the share volume initiated by sellers, normalized by total volume.
This variable is calculated over the same 5-day interval as the shorting measure. Positive OIB is defined as max(OIB,0); negative OIB
is min(OIB,0). All explanatory variables are normalized to have cross-sectional mean zero and unit standard deviation each day,
except for OIB, which is not demeaned but is standardized to have unit standard deviation before partitioning into positive and
negative values. The t-statistics are reported below the parameter estimates and are based on the time-series of coefficient estimates
from the cross-sectional regressions using Newey-West with 20 lags.
Book Previous
Shorting Log to Return month Positive Negative adj
LHS Variable Intercept share mktcap market volatility return Turnover OIB OIB R2
1.80 -0.52 -1.10 0.42 0.39 -0.03 -0.41 0.08 -0.51 7.6%
2.58 -8.69 -6.74 2.91 1.47 -2.26 -3.07 1.18 -4.06
0.76 -0.49 -0.59 0.17 0.38 -0.02 -0.33 0.09 -0.53 3.8%
4.33 -9.64 -6.31 1.72 1.74 -1.79 -2.94 1.61 -3.72
41
Table V. Different types of short-sellers and different holding periods
The sample consists of all common stocks listed on the NYSE January 2000 – April 2004. Firms are sorted into quintiles based on shorting’s share of
trading volume for the past five days. Average Fama-French alphas for the value-weighted return on the heaviest shorting quintile less that of the lightest
shorting quintile are reported for holding periods of 10, 20, 40, and 60 trading days. In Panel B, calendar-time daily alphas are multiplied by 20 and are
expressed in percent. T-tests are based on the time-series of daily alphas. In Panel C, we obtain NYSE monthly short interest release dates, and we omit
those days from the portfolio formation process and from the holding period returns.
Fama-MacBeth regressions of daily observations for all common stocks listed on the NYSE, Jan 2000 through Apr 2004. The dependent variable is the
Fama-French three-factor alpha over the following 20 trading days. Shorting is measured as a percentage of NYSE volume in that stock over the previous
five trading days. Size, book-to-market, return volatility, and turnover are calculated using data from the previous calendar month. Order imbalance is
calculated using Lee and Ready (1991) and is the share of volume initiated by buyers less the share volume initiated by sellers, normalized by total
volume. This variable is calculated over the same 5-day interval as the shorting measure. Positive OIB is defined as max(OIB,0); negative OIB is
min(OIB,0). All explanatory variables are normalized to have cross-sectional mean zero and unit standard deviation each day, except for OIB, which is
not demeaned but is standardized to have unit standard deviation before partitioning into positive and negative values. T-statistics are below the
parameter estimates and are based on the time-series of coefficient estimates from the cross-sectional regressions using Newey-West standard errors with
20 lags.
1.00 -0.03 -0.54 0.18 0.44 -0.02 -0.36 -0.21 -0.63 3.7%
6.07 -0.64 -5.80 1.79 2.03 -2.07 -3.19 -4.14 -4.49
0.79 -0.44 -0.55 0.18 0.41 -0.02 -0.32 0.04 -0.57 3.8%
4.56 -9.15 -5.75 1.78 1.88 -1.89 -2.84 0.68 -4.05
0.97 -0.12 -0.53 0.18 0.43 -0.02 -0.35 -0.17 -0.62 3.8%
5.88 -2.48 -5.68 1.79 2.00 -2.03 -3.08 -3.31 -4.45
0.97 -0.23 -0.58 0.18 0.39 -0.02 -0.37 -0.15 -0.59 3.8%
5.75 -4.37 -6.24 1.77 1.82 -2.01 -3.26 -2.75 -4.22
0.98 -0.18 -0.59 0.18 0.42 -0.02 -0.36 -0.16 -0.60 3.8%
5.80 -3.49 -6.00 1.80 1.97 -1.95 -3.16 -3.09 -4.28
0.98 -0.11 -0.54 0.18 0.44 -0.02 -0.36 -0.19 -0.62 3.7%
5.85 -2.55 -5.80 1.81 2.04 -2.01 -3.16 -3.65 -4.41
0.76 0.00 -0.39 -0.06 -0.15 -0.10 -0.05 -0.59 0.16 0.36 -0.02 -0.33 0.10 -0.52 4.2%
4.40 0.01 -7.88 -1.25 -2.76 -1.85 -1.04 -6.05 1.63 1.68 -1.70 -2.90 1.83 -3.71
43
Table VII. The information in short sale orders of various sizes
The sample consists of all common stocks listed on the NYSE and extends from January 2000 through
April 2004. Panel A provides a breakdown by account type for short sale orders in a given size range;
each row sums to 100%. For Panels B and C, firms are first sorted into quintiles based on shorting as a
fraction of total volume over the past five days. Within each quintile, firms are then sorted into
quintiles based on the prevalence of a given order size among short orders in that stock for the past five
days. Daily value-weighted returns (Panel B) and Fama-French alphas (Panel C) are calculated using a
calendar-time approach with a holding period of 20 trading days. Daily mean returns and alphas are
given in percent, multiplied by 20, for the return on the quintile with the most short sale orders of the
given size less the return on the quintile with the fewest short sale orders of the given size.
Fraction of all short sale orders in the given order size category
Order size
(in shares) Individual Institution Proprietary Other
Non-prog. Program Non-prog. Program
1 – 499 1% 32% 26% 15% 19% 8%
500 – 1,999 1% 51% 19% 10% 11% 7%
2,000 – 4,999 2% 53% 20% 10% 7% 9%
5,000 – 9,999 2% 52% 14% 11% 4% 17%
10,000 – 1% 45% 8% 13% 2% 31%
Average short sale order size (in shares)
820 743 550 729 398 1,015
44
Table VIII. Shorting flow vs. changes in short interest.
The sample consists of all common stocks listed on the NYSE and extends from January 2000 through
April 2004. The shorting activity measure is for the past five days; the change in short interest is from
the previous calendar month. Daily value-weighted returns and alphas are calculated using a calendar-
time approach with a holding period of 20 trading days. Daily mean returns and alphas are given in
percent, multiplied by 21, for the return on the quintile with the highest value of the second sort
characteristic minus the return on the low quintile.
Panel A: First sort is change in short interest Panel B: Second sort is changes in short interest
low 2 3 4 high low 2 3 4 high
Second sort: number of executed short sale orders First sort: number of shorting trades
pf5 – pf1 -1.71 -1.57 -2.71 -1.29 -1.54 -0.42 -0.20 -0.63 -0.03 0.12
t-stat -3.71 -3.63 -6.40 -3.00 -3.53 -1.43 -0.75 -2.26 -0.10 0.27
Second sort: shares sold short First sort: shares sold short
pf5 – pf1 -1.58 -1.48 -2.41 -0.91 -1.04 -0.70 -0.48 -0.11 -0.04 0.02
t-stat -3.73 -3.43 -5.86 -2.11 -2.59 -2.59 -1.84 -0.40 -0.12 0.04
Second sort: shorting’s share of trading volume First sort: shorting’s share of trading volume
pf5 – pf1 -1.23 -1.54 -1.60 -1.04 -0.96 0.07 -0.37 -0.29 0.03 -0.12
t-stat -2.53 -3.60 -3.64 -2.44 -2.08 0.15 -0.96 -0.85 0.09 -0.38
45
Figure 1. Risk-adjusted return differences on short-sale portfolios of different account types
The sample consists of all common stocks listed on the NYSE and extends from January 2000 through
April 2004. Firms are sorted into quintiles based on short selling (shares sold short by the specified
account type as a percentage of NYSE trading volume) over the past five days. We show average Fama-
French alphas for holding periods up to 60 trading days. Alphas are for the heaviest shorting quintile less
the lightest shorting quintile and are expressed in percent.
1.00
Cumulative FF alpha (in %)
0.50
0.00
0 10 20 30 40 50 60
-0.50
-1.00
-1.50
-2.00
-2.50
Holding period in days
46
Figure 2. Return differences on short-sale portfolios
The sample consists of all common stocks listed on the NYSE and extends from January 2000 through
April 2004. Firms are first sorted into quintiles based on shorting activity over the past five trading days
(shares sold short as a percentage of NYSE trading volume). The figure reports average value-weighted
return differences (quintile 5 – quintile 1), calculated as the calendar-time daily return difference
cumulated over each calendar month and expressed in percent. Institutional and proprietary shorting
measures exclude executions that are part of a program trade.
2
Monthly return (in %)
-2
-4
-6
-8
-10
2000 2001 2002 2003 2004
47