Short Sales, Stealth Trading, and the Suspension of the Uptick Rule

Boehmer, Jones, and Zhang (2008a JF) show that informed short sellers do not stealth trade and hypothesize that because short sellers face execution uncertainty caused by the uptick rule, informed short sellers cannot afford to break up their larger trades into smaller trades in order to hide their information. This paper tests whether short sellers' propensity to stealth trade is related to the presence of the uptick rule. Contrary to the hypothesis in Boehmer, Jones, and Zhang (2008a), we show that the distribution of information contained in short sales shifts to larger trade sizes, rather than to smaller trade sizes, after the suspension of the uptick rule. We also show that the increase in information contained in large short sales during the post-suspension period is driven by stocks that are most likely to face binding short-sale constraints. Combined, results in this study suggest that the use of larger trade sizes by informed short sellers is affected more by equity borrowing constraints than by regulatory constraints such as the uptick rule