Short Selling Equity Exchange Traded Funds and its Effect on Stock Market Liquidity

55 Pages Posted: 22 Jan 2017 Last revised: 21 Feb 2019

See all articles by Egle Karmaziene

Egle Karmaziene

VU University Amsterdam; Swedish House of Finance; Tinbergen Institute

Valeri Sokolovski

HEC Montreal - Department of Finance

Date Written: February 18, 2019


We examine short selling of equity exchange traded funds (ETFs) using the September 2008 short-sale ban. Contrasting the previously-documented contractions in other bearish strategies, we demonstrate that during the ban the short sales of the largest and the most liquid ETF, the S&P 500 Spider, significantly increased. We offer evidence that it was driven primarily by short sellers circumnavigating the ban. We also document a concurrent increase in the supply of ETF shares suggesting that they can be created to accommodate short-sales. Additionally, we show that the detrimental effect of regulatory short-sale constraints on stock liquidity was up to 10% less severe for the constituents of the Spider. Our results suggest that short-sales of ETFs are a viable substitute for directional short-sales of individual stocks. They also highlight a novel channel through which ETFs can have a positive effect on the liquidity of its underlying securities.

Keywords: exchange traded funds, ETFs, short selling, ban, short-sale constraints, SEC, financial crisis, regulatory arbitrage

JEL Classification: G14, G18, G28

Suggested Citation

Karmaziene, Egle and Sokolovski, Valeri, Short Selling Equity Exchange Traded Funds and its Effect on Stock Market Liquidity (February 18, 2019). Swedish House of Finance Research Paper No. 14-05. Available at SSRN: or

Egle Karmaziene (Contact Author)

VU University Amsterdam ( email )

De Boelelaan 1105
Amsterdam, ND North Holland 1081 HV


Swedish House of Finance

Drottninggatan 98
Stockholm, 111 60

Tinbergen Institute ( email )

Burg. Oudlaan 50
Rotterdam, 3062 PA

Valeri Sokolovski

HEC Montreal - Department of Finance ( email )

3000 Chemin de la Cote-Sainte-Catherine
Montreal, Quebec H3T 2A7


Here is the Coronavirus
related research on SSRN

Paper statistics

Abstract Views
PlumX Metrics