Article: Fails-to-deliver, short selling, and market quality

Article - Academic

Fails-to-deliver, short selling, and market quality

Veljko Fotak, Vikas Raman, Pradeep K. Yadav

Journal of Financial Economics, 1 December 2014

We investigate the aggregate market quality impact of equity shares that fail to deliver (hereafter “FTDs”). For a sample of 1,492 NYSE stocks over a 42-month period from 2005 to 2008, greater FTDs lead to higher liquidity and pricing efficiency, and their impact is similar to our estimate of delivered short sales. Furthermore, during the operative period of a Security and Exchange Commission (SEC) order mandating stock borrowing prior to short sales, the securities affected display relatively lower liquidity and higher pricing errors. Finally, we do not find any evidence that FTDs caused price distortions or the failure of financial firms during the 2008 financial crisis.

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Paper: Naked Short Selling: The Emperor’s New Clothes?

Paper

Naked Short Selling: The Emperor’s New Clothes?

Veljko Fotak, Vikas Raman, Pradeep K. Yadav

University of Oregon, 6 July 2009

Regulatory and media concern has focused heavily on the potentially manipulative distortion of market prices associated with naked short selling. However, naked shorting can also have beneficial effects for liquidity and pricing efficiency. We empirically investigate the impact of naked short-selling on market quality, and find that naked shorting leads to significant reduction in positive pricing errors, the volatility of stock price returns, bid-ask spreads, and pricing error volatility. We study naked shorting surrounding the demise of financial institutions hardest hit by the financial crisis in 2008 and find no evidence that stock price declines were caused by naked shorting.

PDF (51 pages): Naked Short Selling: The Emperor’s New Clothes?