Naked shorting is still here: Its effects on market qualityNaked shorting is still here: Its effects on market quality

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The GameStop mania has resulted in another debate about the menace of short selling, with special attention to naked short selling. While former literature generally backed naked short selling as net beneficiary practice towards market quality by limiting short sale constraints, regulators consistently tightened regulation SHO to curb naked short selling. Research since the last reg SHO rulings is near non-existent. This study aims to find evidence about the effects of naked short selling on overall market quality in the current US regulatory environment. To answer this question an empirical study with a combination of cross-sectional and panel analysis is applied. With the help of the innovative Pincus Index as measure of market randomness, the results show that naked short selling enhances stock price process randomness, which is consistent with improving Martingale efficient markets. This effect is stronger when naked short sales are present for higher constraint stocks. However the results also show that naked short sales decrease market liquidity in the form of higher bid-ask spreads. This effect appears weaker when present under higher short sale constraint stocks. Moreover do the results indicate that naked short selling increases stock price intraday volatility.
Faculteit der Managementwetenschappen