NEWS

Mark Hulbert, in his New York Times column (March 26), reports on a recent study showing that the average short-seller has done well through astute research and analysis, not market manipulation.

The study is titled “How Are Shorts Informed? Short Sellers, News and Information Processing.” Its authors are Joseph E. Engelberg and Adam V. Reed, both finance professors at the University of North Carolina at Chapel Hill, and Matthew C. Ringgenberg, a Ph.D. student there.

“The researchers analyzed a database containing all short sales involving stocks listed on the New York Stock Exchange from January 2005 to July 2007. The database showed the exact time and price at which each short sale was executed. That enabled the researchers to compare the timing of short sales with the publication of news articles about the companies whose stocks had been sold short.

“They found that, in a vast majority of cases, short-sellers reacted to news articles when the rest of the market did. As a result, the ratio of short-sale volume in a given stock to overall trading volume remained virtually constant over a period beginning three weeks before the typical news article about that stock and lasting until three weeks after.

“The researchers reached the same results when they focused only on articles that reported negative information about the stock’s underlying company.

“These results suggest that, for the most part, at least, ’short-sellers do not uncover and trade on information before it becomes publicly available,’ the researchers wrote.

“Furthermore, they found that in those cases when the timing of short-sellers’ trades did deviate from the timing of other types of trades, more often than not the short-sellers reacted later rather than earlier. In an interview, Professor Reed said that these results show that ’short-sellers are primarily reactive rather than proactive,’ and so it is ‘unfair to blame the average short-seller for engaging in so-called ‘distort and short’ schemes.’

“What, then, is the source of short-sellers’ historical success? The researchers concluded that the most likely explanation was that short-sellers, compared with other kinds of traders, have a superior ability ‘to analyze publicly available information.’ ”