Banning Short Sales and Market Quality: The U.K.'s Experience
36 Pages Posted: 20 Jul 2010
Date Written: July 20, 2010
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: Suggested Citation