Beware of the Spider: Exchange Traded Funds and the 2008 Short-Sale Ban

Posted: 26 Mar 2014 Last revised: 14 Oct 2020

See all articles by Egle Karmaziene

Egle Karmaziene

VU University Amsterdam; Swedish House of Finance

Valeri Sokolovski

University of Alberta

Date Written: March 12, 2015

Abstract

This paper examines the effects of the 2008 short-sale ban on exchange traded funds (ETFs). Short sales of banned stocks decreased significantly during the ban period. However, we demonstrate that a portion of that decrease was reabsorbed by financial-sector ETFs and the biggest and most liquid ETF - the S&P 500 Spider. We argue that short selling equity ETFs was a viable method of circumnavigating the ban. Additionally, we offer evidence that the supply of ETF shares available for lending was able to be increased rapidly to meet the demand through ETFs' unique creation mechanism (“create-to-lend”).

Keywords: exchange traded funds, ETFs, short selling, ban, short-sale constraints, SEC, financial crisis, regulatory arbitrage

JEL Classification: G14, G18, G28

Suggested Citation

Karmaziene, Egle and Sokolovski, Valeri, Beware of the Spider: Exchange Traded Funds and the 2008 Short-Sale Ban (March 12, 2015). Swedish House of Finance Research Paper No. 14-05, Available at SSRN: https://ssrn.com/abstract=2416291 or http://dx.doi.org/10.2139/ssrn.2416291

Egle Karmaziene (Contact Author)

VU University Amsterdam ( email )

De Boelelaan 1105
Amsterdam, 1081HV
Netherlands

Swedish House of Finance ( email )

Drottninggatan 98
Stockholm, 111 60
Sweden

Valeri Sokolovski

University of Alberta ( email )

Edmonton, Alberta T6G 2R3
Canada

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