Analysis of the effect of restrictions on net short positions on Spanish shares between March and May 2020

Ramiro Losada and Albert Martinez

CNMV Working Papers from CNMV- Spanish Securities Markets Commission - Research and Statistics Department

Abstract: This article analyzes what the cost may have been, in terms of market efficiency, of the ban on creating or increasing net short positions on the most liquid securities traded in the Spanish markets, which partially entered into force on 13 March 2020 and was then applied continuously from 17 March to 18 May. Specifically, the impact on some liquidity measures (such as the bid-ask spread, trading volume or the Amihud measure) is analyzed, as well as the impact on returns and intraday volatility of prices. Another objective is to assess whether the ban could have influenced the credit risk of financial and non-financial issuers whose securities are listed on equity markets. To perform the analysis, a study was made of variables related to the returns, vola¬tilities and liquidity measures of the shares listed on the stock exchanges that made up the Ibex 35 index in Spain and those that form part of the German Dax 30. The German index was chosen for this analysis, firstly, because its financial markets regulator did not adopt the decision to restrict short trades and, secondly, because the trends marked by prices, volatilities and liquidity measures during the period prior to the implementation of the measure in Spain were similar in the financial markets of both countries.From both the descriptive and econometric analyses it can be deduced that the securities included in the ban experienced a larger drop in liquidity (as measured by the bid-ask spread) compared to the unrestricted scenario, an impact which persisted when the ban was lifted, albeit to a lesser degree. However, there is no evidence of other effects derived from the ban on other relevant variables as the trading volumes, the price evolution, volatility, market depth or the issuers´credit spreads.

Date: 2020
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