single stock futures as a substitute for short sales evidence from microstructure data
artley R. Danielsen ¹ , Robert A. Van Ness ¹ and Richard S. Warr ¹*

¹ The first and third authors are from the College of Management, North Carolina State University. The second author is from the University of Mississippi School of Business. They wish to thank the editor and the anonymous referee for their comments on earlier drafts of this paper as well as session participants at the 2007 Financial Management Association Annual Meeting. The usual disclaimer applies.

* Address for correspondence: Richard S. Warr, College of Management, Box 7229, North Carolina State University, Raleigh, NC 27695-7229, USA.
e-mail: rswarr@ncsu.edu

Copyright Journal compilation © 2009 Blackwell Publishing Ltd

KEYWORDS

stock futures • microstructure • short sales

ABSTRACT

Abstract: We examine how the introduction of single-stock futures impacts short sale costs and short interest levels in the underlying spot market. We find that short selling in the underling securities declines, after futures are introduced, the cost of borrowing stock for short sales declines and the available unborrowed supply of lendable shares increases. These results are consistent with futures exchanges providing a low-cost substitute market for establishing short positions. Microstructure evidence also suggests that the lower cost and greater ease of short selling via futures markets draws informed traders from the spot market.

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(Paper received October 2007, revised version accepted May 2009)

DIGITAL OBJECT IDENTIFIER (DOI)

10.1111/j.1468-5957.2009.02159.x