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.