The 2020 European Short-Selling Ban and the Effects on Market Quality

Abstract

Responding to the dramatic price declines during the COVID-19 pandemic, six European countries introduced short-selling bans in March 2020. We analyze how these restrictions affected the market quality by comparing countries with and without bans. We observe for ban countries relatively lower market liquidity, lower trading volume, and wider bid-ask spreads. Moreover, regulators’ aim to prevent price declines and reduce volatility failed, as ban and no-ban countries reveal no differences and prices increased. Our results clearly detail the negative market-quality effects resulting from restrictions, especially for smaller markets and firms. Consequently, this regulatory interference did not protect but harmed investors.

Keywords: Short-selling ban, COVID-19, market-quality measures, liquidity, volatility, trading volume

JEL Classification: D02, G12, G14, G18, G28