Data Speaks - Stock traders education

1. SHORT SELLING – WHAT DATA
SPEAKS (NASDAQ MARKET)
Nasir Saeed Tareen –
nsktareen@gmail.com
+92.3018212311
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2. 1) overall, 1 of every 42 trades involves a short sale
2) Short selling is more common among stocks with high returns than stocks with weaker performance
3) Actively traded stocks experience more short sales than stocks of limited trading volume
4) Short selling varies directly with share price volatility
5) Short selling does not appear to be systematically different on various days of the week
6) Days of high short selling precede days of unusually low returns.
SHORT SELLING – GENERAL VIEW
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3. FREQUENCY OF SHORT SELLING-TWO COMPLEMENTARY METRICS
The first is the “percentage of short trades,”
which is the ratio of short trades to the total
number of trades in a stock within a day.
This percentage addresses the likelihood
that the seller in a transaction is shorting.
The second is “percentage of shorted
shares,” which is the ratio of the shares in the
short trades to the total number of a
company's shares traded in the day. This
percentage concerns the probability that a
traded share is being shorted.
Study found that, on average, the
seller in 1 of every 42 trades is
shorting and that 1 of every 35
traded shares is a shorted share.
These results indicate that short
sellers tend to transact in larger
volume than the typical
nonsporting investor.
Calculate: Stock x
Short sell shares/Total shares
Short sell trades/Total trades
These results indicate that
short sellers tend to
transact in larger volume
than the typical non
shorting investor.
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4. SHORT SELLERS TEND TO FOLLOW A CONTRARIAN
STRATEGY
The second issue Study examined is
whether short selling varies with a stock's
price performance in a manner that is
consistent with either a momentum or
contrarian investing style
These results are most consistent with the
proposition that short sellers tend to follow
a contrarian strategy.
After partitioning the sample into quintiles
based on the within-sample percentage
change in the stock's price, Study found
that both the percentage of short trades
and the percentage of shorted shares
were highest for the quintiles containing
the stocks with the highest returns and
lowest for those with the lowest returns.
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5. THE LINK BETWEEN SHORT SELLING AND
TRADING VOLUME
The liquidity offered by high-volume
stocks potentially reduces the probability
that the short seller will experience a
“short squeeze” (when the shares that
have been lent to the investor for the short
sale are recalled).
After partitioning the sample according
to trading volume, we found that both
the percentage of short trades and the
percentage of shorted shares declined
monotonically with trading volume.
Therefore, as hypothesized, short sellers
tend to be more interested in high-
volume stocks.
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6. SHORT SELLING AND STOCK PRICE VOLATILITY
Examined the relationship between short
selling and stock price volatility.
Specifically, Study searched for any
contemporaneous connection between the
two
After partitioning the sample into quintiles
according to the standard deviation of
within-sample stock return, we found that
short selling is highest for the most volatile
stocks and lowest for low-volatility stocks.
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7. FINAL THOUGHTS
A number of prior studies documented a trend in which returns on certain days of the
week tend to be significantly lower than returns on other days. Therefore, we
considered whether any such day-of-the-week pattern is to be found in short selling.
Somewhat surprisingly, our results indicate little day-to-day variation in short selling.
Finally, Study examined the potential short-term profitability of short selling by
examining market- adjusted returns following days of significantly high short selling.
We found statistically significant three-day excess returns of −1.23 percent following
days of high short selling, implying that an investor who opens a short position on a
day of high short selling in a stock and closes it three days later can obtain a positive
net profit.
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