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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.

Using Insider Trading to Find Informed Short Sellers

Conventional wisdom says that both short sellers and corporate insiders are typically better informed than most traders. However, much short selling comes from programmed (uninformed) hedging, and much insider trading is pre-planned diversification of concentrated positions by firm executives. Is there a way to overlay the activities of these two groups to isolate truly informed trading? In their July 2007 draft paper entitled “Shorts and Insiders”, Amiyatosh Purnanandam and Nejat Seyhun investigate the combined power of unusual levels of short interest and unusual insider trading to predict stock returns. They test for “unusual” short interest and insider trading by subtracting the historical mean from the current value and dividing this difference by the historical standard deviation on a firm-by-firm basis. Using monthly short interest, insider trading and stock return data for all NYSE/AMEX-listed firms during 9/91-12/03, they find that: Keep Reading

Shark Attacks?

Do some short sellers employ sharp intraday attacks on targeted stocks to trigger temporary plunges, during which they cover at a profit? In the March 2007 draft of his paper entitled “Predatory Short Selling”, Andriy Shkilko examines empirical evidence of such behavior. Using all trades and quotes in Nasdaq-listed stocks during regular trading hours from April 2005 to April 2006, he identifies 1,482 potential predatory attacks and concludes that: Keep Reading

Three Questions on Naked Short Selling

Is naked short selling a problem? The incentives for it seem direct and strong, while both regulation and enforcement against it seem weak. Just getting the facts about its extent is problematic. Here are three relevant questions: Keep Reading

Risky Stocks + Short Sellers = Low Returns

Do short sellers avoid highly volatile stocks, and thereby leave them overvalued? If so, when short sellers do attack volatile stocks, is the level of overvaluation therefore compelling? In the August 2006 update of their paper entitled “Costly Arbitrage and Idiosyncratic Risk: Evidence from Short Sellers”, Ying Duan, Gang Hu and David McLean test the hypothesis that short sellers tend to avoid stocks with high idiosyncratic risk because of the high cost of hedging such risk. Using data for stock prices, short interest levels and other factors spanning 1988-2003, they find that: Keep Reading

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

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