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Short Selling

Are there reliable paths to success in short selling? Is short selling activity a useful indicator for investors/traders? Does it mean “stay away” or “squeeze coming?” These blog entries cover the short side of the market.

An Analysis of NFI FTDs: Regulation SHO Fails to Deliver

An investor recently obtained from the Securities and Exchange Commission (SEC) via the Freedom of Information Act a daily record over an extended period of aggregate Fails-to-Deliver (FTDs) known to the agency for NovaStar Financial Inc. (NFI). FTDs occur when brokers do not match short sales with shares to borrow within a specified number of business days. NFI investor Millerd1 suggested that there should be relationships between the FTDs for NFI and its total short interest, stock trading volume and stock price. Here are three hypotheses to test: Keep Reading

Are Some Shorts Smarter Than Others?

The prevailing wisdom is that, in general, short sellers know what they are doing. But there are different kinds of short sellers, likely in a range from highly informed to noise. Can we find the ones who are best informed? In the November 2005 version of their paper entitled “Which Shorts Are Informed?”, Ekkehart Boehmer, Charles Jones and Xiaoyan Zhang examine a large proprietary dataset to segregate short-sellers according to the informativeness of their trading. Using data on short sales for an average of over 1,200 NYSE stocks daily during the period January 2000 through April 2004, they find that: Keep Reading

What Happens to Stocks Going on the Regulation SHO Threshold List?

What happens to stocks going on the NASDAQ Regulation SHO threshold list during. Does going on the list inhibit further short sales because (more than) all available shares have already been borrowed, allowing price to drift upward? Does it indicate that shorting has been overdone? Or, does appearance on the list scare off potential buyers, driving price lower? Using the  daily NASDAQ threshold lists for June 2005 and contemporaneous daily stock price data from Yahoo! Financewe find that: Keep Reading

Could Failures Point to Success?

The Regulation SHO threshold security lists for the NASDAQ and NYSE flag those stocks for which a significant percentage of short sales are not balanced by borrowed shares. What happens to returns when stocks come off the threshold list? Does coming off the list release pent-up shorting demand, driving price down? Or, does it indicate that shorting has been overdone, with prices subsequently drifting up? Using the  daily NASDAQ threshold lists for June 2005 and contemporaneous daily stock price data from Yahoo! Financewe find that: Keep Reading

Short Sellers: Contrarian or Momentum Traders?

In the July 2005 update of their paper entitled “Can Short-sellers Predict Returns? Daily Evidence”, Karl Diether, Kuan-Hui Lee and Ingrid Werner examine recently available daily short sales data to test whether short-sellers trade with or against the trend and whether they can predict future returns. Using the SEC-mandated tick-by-tick short-sale data for 2,815 Nasdaq-listed stocks from the first quarter of 2005, they find that: Keep Reading

Short Sellers Not So Smart?

In their May 2005 draft paper entitled “Do Short Sale Transactions Precede Bad News Events?”, Holger Daske, Scott Richardson and Irem Tuna challenge prior research that found short sellers are especially sophisticated and beat bad news to the market. By studying very recent short sale transactions for 3,651 securities on the New York Stock Exchange from April 2004 through February 2005, they find that: Keep Reading

What Makes Shorts Throw in the Towel?

In their February 2005 paper entitled “Holding on to Your Shorts: When do Short Sellers Retreat?”, Pavel Savor and Mario Gamboa-Cavazos examine NASDAQ trades during the period June 1988 through August 2001 to determine the circumstances in which short sellers choose to increase their common stock positions and those in which they choose to cover. They focus on stocks unlikely to have unusual short sale constraints.The authors find that: Keep Reading

Short Kiss of Death?

In his January 2005 paper on “Constrained Short Selling and the Probability of Informed Trade”, Tyler Henry explores the relationship between private information and the returns on stocks with high short interest. He finds that: Keep Reading

Short Selling Shocks Stocks

In their February 2005 paper entitled “The Link Between Short Sale Constraints and Stock Prices”, Lauren Cohen, Karl Diether and Christopher Malloy isolate supply and demand shifts in equity lending to examine shorting demand as an indicator, and cause, of future stock returns. Using actual share loan prices and quantities from a large institutional investor during August 1999 to July 2003, they find that: Keep Reading

Buffering Exuberance

In their December 2003 paper on “Aggregate Short Interest and Market Valuations” Owen Lamont and Jeremy Stein examine the countercyclical nature of aggregate short interest and the aggregate put/call option ratio. They note that, for individual stocks, demand for shorting correlates with abnormally low future returns. However, for stocks in aggregate, they conclude that: Keep Reading

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