UNLEASHED SHORT SELLING

We examine short selling activities on the NYSE from July to Oct 2007, a period during which the uptick rule was permanently removed by the SEC. Short sellers increase their trading following negative market returns and positive individual stock returns. Short sellers target stocks with positive returns and timing their trades when the market trends down. The results are robust after accommodating other factors that determine short selling, such as volatility, spreads, and turnover. Not all short sellers are capable of predicting future stock returns, only those who trade on private information can. A long-short trading strategy with a holding period of two weeks and based on past abnormal short selling activity generates significant positive returns during the sample period