Abstract

This study shows that short sale trades on BATS exchanges have significant return predictability beyond the wellestablished short-sale demand and short-sale constraints measures during 2011 to 2015.

Specifically, we report 57 (43) bps monthly value-weighted (equal-weighted) abnormal returns on the long-short high-low aggregate BATS short portfolios, where both the long and short legs of the strategy contribute to the profits.

More importantly, we show that the return predictability of short selling on a specific exchange depends on the cost-rebate structure and the liquidity of the exchange.

Our findings have implications for the SEC ’s Transaction Fee Pilot project and shed light on how market maker compensation plays a role in the information discovery of informed traders such as short sellers