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Banning Short Sales and Market Quality: The U.K.'s Experience

36 Pages Posted: 20 Jul 2010  

Ian W. Marsh

City University London - Sir John Cass Business School

Richard Payne

City University London - Sir John Cass Business School

Date Written: July 20, 2010

Abstract

We study the effects that the ban on short sales of shares in financial firms introduced in late 2008 and removed early 2009 had on the microstructure and the quality of UK equity markets. We show that the ban did nothing to affect order flows: financial stocks were being more aggressively sold off than their peers pre-ban and this situation persisted through the ban period. Trading volume in financials was massively reduced, however. The ban also decimated order book liquidity for financials. The deterioration was symmetric, affecting the limit buy and limit sell side of the order book equally. Finally we show that, through the period of the ban, markets for financial stocks were substantially less efficient and that the role of the trading process aiding in price discovery was greatly reduced. The effects identified above were largely reversed once the ban was lifted. We thus argue that the ban had detrimental effects on the quality of UK equity markets and that, far from being stabilising, the ban exacerbated problems of volatility in the prices of and uncertainty in the values of UK financial stocks.

Keywords: Short Selling, Regulation, Microstructure

JEL Classification: G14, G18

Suggested Citation

Marsh, Ian W. and Payne, Richard, Banning Short Sales and Market Quality: The U.K.'s Experience (July 20, 2010). Available at SSRN: https://ssrn.com/abstract=1645847 or http://dx.doi.org/10.2139/ssrn.1645847

Ian William Marsh (Contact Author)

City University London - Sir John Cass Business School ( email )

106 Bunhill Row
London, EC1Y 8TZ
United Kingdom
+44 20 7040 5121 (Phone)
+44 20 7040 8881 (Fax)

HOME PAGE: http://www.cass.city.ac.uk/faculty/i.marsh

Richard G. Payne

City University London - Sir John Cass Business School ( email )

106 Bunhill Row
London, EC1Y 8TZ
United Kingdom

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