Short sales, margin purchases and bid–ask spreads

• We examine patterns of short sales, margin trades, adverse selection, and spreads.
• Both short sales and margin purchases exhibit a U-shaped intraday pattern.
• Both are positively related to adverse selection and bid–ask spreads.
• Bid–ask spread patterns can be explained by short sales and margin trades.

This study examines intraday patterns of short sales, margin purchases, adverse selection, and bid–ask spreads in the order-driven market of the Taiwan Stock Exchange (TWSE). We find that both short sales and margin purchases exhibit a U-shaped intraday pattern in the TWSE. We further show that short sales and margin purchases have a significantly positive relationship with adverse selection and bid–ask spreads. We provide evidence that the U-shaped pattern of bid–ask spreads can be explained by short selling and margin trading activities.