Short Sellers: Informed Liquidity Suppliers

Short sellers often have a bad reputation, seen as market disruptors who profit from declining prices. Yet, they play a crucial role in making markets more efficient by identifying overvalued assets and correcting mispricings. A recent study uncovers another surprising aspect of their behavior: rather than just demanding liquidity, the most informed short sellers actually provide it. Using transaction-level data, the research shows that these traders supply liquidity, especially on news days and when trading on known anomalies, challenging the conventional view of short sellers as merely aggressive market participants.

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