Regulatory Uncertainty and Market Liquidity: The 2008 Short Sale Ban's Impact on Equity Option Markets

Battalio, Robert H.; Schultz, Paul

doi:10.2139/ssrn.1534932

Cited by 96 publications

(104 citation statements)

References 23 publications

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“…Kaul, Nimalendran, and Zhang (2004), Engle and Neri (2010), Wei and Zheng (2010), Goyenko, Ortahanlai, and Tang (2015) and Guillaume (2015) provide empirical support for a positive relation between spot market liquidity and options market liquidity. The empirical results of Battalio and Schultz (2011) and Grundy, Lim, and Verwijmeren (2012) point in the same direction. They investigate how the 2008 short-sale ban for certain stocks in the U.S. affected the corresponding options markets and find that the liquidity in the options market was lower during the ban.…”

Section: Introductionsupporting

confidence: 53%

Illiquidity Transmission from Spot to Futures Markets

2013

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Section: Introductionsupporting

confidence: 53%

Illiquidity Transmission from Spot to Futures Markets

2013

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“…Diether et al, 2009;Boehmer, Jones, and Zhang, 2013;Beber and Pagano, 2013;Battalio and Schultz, 2011). The consequences of short-sale bans following the financial crisis of [2007][2008] have attracted great interest among researchers.…”

Section: Introductionmentioning

confidence: 99%

Flying Under the Radar: The Effects of Short-Sale Disclosure Rules on Investor Behavior and Stock Prices

Jank,

Roling

2016

SSRN Journal

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Reproduction permitted only if source is stated.ISBN 978-3-95729-275-9 (Printversion) Non-technical summary Research Question "Going short", the selling of a security that is not currently owned, and subsequently repurchasing it, is a common practice in financial markets. Controversial in society at large, short sellers play a major role in financial theory. Moreover, there is ample evidence that short selling, in general, contributes to market efficiency, enhances liquidity, and facilitates risk management. However, there has been intense debate, among academia, regulators, and the general public, that the practices of short sellers remain largely in the dark. Unlike long positions, which in most countries are governed by various disclosure rules, short positions have not been subject to such disclosure requirements hitherto. Proponents of short-selling disclosure rules argue that greater transparency increases the efficiency and fairness of financial markets. However, public disclosures may pose a threat to proprietary investment strategies and may harm the interests of short sellers. As a consequence, a disclosure rule could affect the trading behavior of investors and the efficiency of security prices. These questions lie at the heart of the debate on introducing a disclosure obligation for short sellers and have yet to be answered. ContributionIn this paper, we analyze how transparency requirements for short sales affect investors' behavior and security prices. We utilize the novel transparency regulation for short sales introduced in the European Union and observe both public short positions above, and confidential positions below, the disclosure threshold in Germany. Our main research questions are as follows. First, we investigate whether investors are reluctant to increase their short positions beyond the public disclosure threshold. Second, we analyze whether such reluctance represents a short-selling constraint on the investors and therefore affects the efficiency of stock prices. ResultsWe document that a sizable fraction of investors are reluctant to disclose their short positions publicly. Just below the disclosure threshold, positions accumulate, exhibit an abnormally low probability of increasing, and remain unchanged for an abnormally long time. This reluctance to cross the publication threshold represents a short-sale constraint for a large fraction of investors. Consistent with the overpricing hypothesis, when the short-sale constraint imposed by the disclosure threshold is potentially binding, stocks exhibit negative abnormal returns of 1.0-1.4% on a monthly basis. Different placebo tests verify that the short-sale constraint originates from the disclosure rule. Overall, these findings suggest that the investors' reluctant behavior in response to the short-sale transparency regulation imposes negative externalities on stock market efficiency. This paper analyzes how newly introduced transparency requirements for short positions affect investors' behavior and security prices. Employing a uniq...

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“…In this sub-section, we empirically examine whether FTDs arise overwhelmingly from short sales (rather than "long" sales) using a natural experiment arising from the exogenous imposition by the SEC of an Emergency Boulton and Braga-Alves (2010) and Kolasinsky, et al (2012) also examine aspects of the July/August 2008 SEC Emergency Order that we investigate in this paper; while other papers - Battalio and Schultz (2011), Boehmer, et al (2011), Autore, et al (2011 and Beber and Pagano (2011) -examine the subsequent September 2008 short selling ban (that we do not examine). 13 FTDs can potentially arise from the mechanism of the offering process in price-supported IPOs (Edwards and Hanley, 2010).…”

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confidence: 99%

Fails-to-deliver, short selling, and market quality

Fotak

Raman

Yadav

2014

Journal of Financial Economics

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We investigate the collective net impact on market liquidity and pricing efficiency of equity trades that result in fails to deliver ("FTDs"). Given the nature of the US electronic trade settlement system for stocks, such "FTD trades" should originate almost exclusively from short sales, and we confirm this empirically on the basis of a natural experiment arising from a regulatory event. For a sample of 1,492 NYSE common stocks over a 42-month period from 2005 to 2008, we find that such trades lead to the same beneficial impact on liquidity and pricing efficiency as short sales that result in timely delivery. We do not find evidence that such trades are causally related to subsequent price declines or distortions, or to the failure of financial firms during the 2008 financial crisis.

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Regulatory Uncertainty and Market Liquidity: The 2008 Short Sale Ban's Impact on Equity Option Markets

Cited by 96 publications

References 23 publications

Illiquidity Transmission from Spot to Futures Markets

Illiquidity Transmission from Spot to Futures Markets

Flying Under the Radar: The Effects of Short-Sale Disclosure Rules on Investor Behavior and Stock Prices

Fails-to-deliver, short selling, and market quality

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