The Impact of the 2008 Short-Sale Ban on Liquidity and Efficiency
This chapter studies the effect of the temporary short-sale ban in 2008 on liquidity and price efficiency. The ban was imposed by the Securities and Exchange Commission (SEC) in the period September 19 to October 8, 2008 to ban short selling of about 1,000 stocks. During this period, stocks on the no-short-sale list experienced a decline in liquidity, which is evidenced by higher cost and price impact of trading. Prices of these stocks also became less efficient and deviated more from random walks. The declines in liquidity and price efficiency of these stocks were more pronounced than similar stocks in which short sales were not banned, suggesting that the changes were not market-wide trends and were at least partially due to the short-sale rule. The analysis has implications for the SEC: introducing more short-sale restrictions, such as restoring the uptick rule, could lead to lower market quality and might be undesirable.