Working Paper: NBER ID: w14158
Authors: Paul Asquith; Rebecca Oman; Christopher Safaya
Abstract: This paper demonstrates that short sales are often misclassified as buyer-initiated by the Lee-Ready and other commonly used trade classification algorithms. This result is due in part to regulations which require short sales be executed on an uptick or zero-uptick. In addition, while the literature considers "immediacy premiums" in determining trade direction, it ignores the often larger borrowing premiums which short sellers must pay. Since short sales constitute approximately 30% of all trade volume on U.S. exchanges, these results are important to the empirical market microstructure literature as well as to measures that rely upon trade classification, such as the probability of informed trading (PIN) metric.
Keywords: Short Sales; Trade Classification; Market Microstructure
JEL Codes: G10; G12; G18
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| regulatory rules (G18) | misclassification of short sales as buyer-initiated trades (G24) |
| uptick and bid-price rules (D44) | misclassification of short sales as buyer-initiated trades (G24) |
| uptick rule (G18) | higher percentage of seller-initiated classifications (D40) |
| pilot securities (G24) | higher percentage of seller-initiated classifications (D40) |
| regulatory environment (G38) | accuracy of trade direction assignments (F17) |