FMV research cluster Brown Bag Seminar 'Short selling in parallel markets with different transparency'

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Abstract – This paper examines how investors behave in parallel markets that trade the same asset but have different degrees of transparency level. Using data from the Taiwan Security Borrowing and Lending market, we find that short sellers with private information prefer to trade  in the opaque market, with momentum and risk-bearing trading strategies prefer to trade in the semi-transparent market, and with urgent liquidity needs (such as short-squeezed short sellers) prefer to trade in the transparent market. We show that transactions in both transparent and opaque markets contain information and provide liquidity. Our results indicate that parallel markets complement each other by serving different types of investors.