We construct a comprehensive panel of trading venue-level short sales and examine where short sellers exploit their information advantage. We examine the tradeoff that informed traders weigh between transaction costs and execution probability posited by Hendershott and Mendelson (2000), Ye (2011), and Zhu (2014), and find that short sales comprise a greater proportion of exchange trading than of dark pool trading. Furthermore, exchange short sales are more informative than dark pool short sales about future price moves. We find evidence of increased exchange short sales and exchange short sale informativeness prior to corporate news events. Finally, we examine the relationship between several market design characteristics and informed trade. The results provide direct evidence that dark pools attract less informed trade than exchanges do, particularly when information is short lived.
Reed, Adam V., Samadi, Mehrdad & Sokobin, Jonathan S., Where Do Shorts Trade? Intermarket Competition and Information Horizon (December 6, 2017). Available at SSRN: https://ssrn.com/abstract=2619839 or http://dx.doi.org/10.2139/ssrn.2619839
Note: Research papers posted on SSRN, including any findings, may differ from the final version chosen for publication in academic journals.