48 Pages Posted: 15 Oct 2014 Last revised: 11 Aug 2016
Date Written: March 30, 2016
We examine the effects of high frequency traders (HFTs) on liquidity using the September 2008 short sale ban. To disentangle the separate impacts of short selling by HFTs and non-HFTs we use an instrumental variables approach exploiting differences in the ban's cross-sectional impact on HFTs and non-HFTs. Non-HFTs’ short selling improves liquidity, as measured by bid-ask spreads. HFTs’ short selling has the opposite effect by adversely selecting limit orders. HFTs’ overall activity also negatively affects liquidity. These negative liquidity effects reduce trading by non-HFTs.
Keywords: high frequency trading, liquidity, price efficiency, short selling
JEL Classification: D4, G10, G14
Suggested Citation: Suggested Citation
Brogaard, Jonathan and Hendershott, Terrence and Riordan, Ryan, High Frequency Trading and the 2008 Short Sale Ban (March 30, 2016). Journal of Financial Economics (JFE), Forthcoming. Available at SSRN: https://ssrn.com/abstract=2509376 or http://dx.doi.org/10.2139/ssrn.2509376