Short sales, stealth trading, and the suspension of the uptick rule

Prior work contends that informed short sellers do not stealth trade because the uptick rule produces “execution uncertainty” and does not afford short sellers the opportunity to spread their trades across time. Contrary to this idea, our results show that informed short sellers tend to use larger trade sizes, instead smaller trade sizes, after the suspension of the uptick rule. Further, we find that the use of smaller short sales during the post-suspension period, which is documented in prior studies, is not a result of greater stealth-trading activity and is instead explained by a reduction in liquidity that occurs when the uptick rule is suspended.

► Short sellers do not increase their stealth trading activity after the suspension of the uptick rule. ► The use of smaller short sales increases during the post-suspension period. ► However, this increase is better explained by a reduction in liquidity that occurs when the uptick rule is suspended rather than increased stealth trading activities.