High frequency trading and the 2008 short-sale ban

Jonathan Brogaard, Terrence Hendershott and Ryan Riordan

Journal of Financial Economics, 2017, vol. 124, issue 1, 22-42

Abstract: We examine the effects of high-frequency traders (HFTs) on liquidity using the September 2008 short sale-ban. To disentangle the separate impacts of short selling by HFTs and non-HFTs, we use an instrumental variables approach exploiting differences in the ban's cross-sectional impact on HFTs and non-HFTs. Non-HFTs’ short selling improves liquidity, as measured by bid-ask spreads. HFTs’ short selling has the opposite effect by adversely selecting limit orders, which can decrease liquidity supplier competition and reduce trading by non-HFTs. The results highlight that some HFTs’ activities are harmful to liquidity during the extremely volatile short-sale ban period.

Keywords: High frequency trading; Short selling; Liquidity (search for similar items in EconPapers)
JEL-codes: G12 G14 G23 (search for similar items in EconPapers)
Date: 2017
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Citations: View citations in EconPapers (28)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:jfinec:v:124:y:2017:i:1:p:22-42

DOI: 10.1016/j.jfineco.2017.01.008

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