Shackling Short Sellers: The 2008 Shorting Ban

TLDR

In September 2008 the SEC temporarily banned most short sales in nearly 1,000 financial stocks. The study examines how the ban affected market quality, shorting activity, the aggressiveness of short sellers, and stock prices. The ban mainly impacts larger stocks, reducing shorting activity by about 77 % and degrading market quality for all but the smallest quartile, while stock prices remain largely unchanged and firms in the lower half of the size distribution are largely unaffected.

Abstract

In September 2008, the U.S. Securities and Exchange Commission (SEC) temporarily banned most short sales in nearly 1,000 financial stocks. We examine the ban's effect on market quality, shorting activity, the aggressiveness of short sellers, and stock prices. The ban's effects are concentrated in larger stocks; there is little effect on firms in the lower half of the size distribution. Although shorting activity drops by about 77% in large-cap stocks, stock prices appear unaffected by the ban. All but the smallest quartile of firms subject to the ban suffer a severe degradation in market quality.