High Frequency Trading and the 2008 Short Sale Ban

48 Pages Posted: 15 Oct 2014 Last revised: 11 Aug 2016

See all articles by Jonathan Brogaard

Jonathan Brogaard

University of Utah - David Eccles School of Business

Terrence Hendershott

University of California, Berkeley - Haas School of Business

Ryan Riordan

Queen's University - Smith School of Business; Ludwig-Maximilians-University Munich, Faculty of Business Administration (Munich School of Management)

Date Written: March 30, 2016

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. HFTs’ overall activity also negatively affects liquidity. These negative liquidity effects reduce trading by non-HFTs.

Keywords: high frequency trading, liquidity, price efficiency, short selling

JEL Classification: D4, G10, G14

Suggested Citation

Brogaard, Jonathan and Hendershott, Terrence J. and Riordan, Ryan, High Frequency Trading and the 2008 Short Sale Ban (March 30, 2016). Journal of Financial Economics (JFE), Forthcoming, Available at SSRN: https://ssrn.com/abstract=2509376 or http://dx.doi.org/10.2139/ssrn.2509376

Jonathan Brogaard

University of Utah - David Eccles School of Business ( email )

1645 E Campus Center Dr
Salt Lake City, UT 84112-9303
United States

HOME PAGE: http://www.jonathanbrogaard.com

Terrence J. Hendershott

University of California, Berkeley - Haas School of Business ( email )

545 Student Services Building, #1900
2220 Piedmont Avenue
Berkeley, CA 94720
United States

Ryan Riordan (Contact Author)

Queen's University - Smith School of Business ( email )

Smith School of Business, Queen's University
143 Union Street
Kingston, Ontario K7L 3N6
Canada

Ludwig-Maximilians-University Munich, Faculty of Business Administration (Munich School of Management) ( email )

Schackstr. 4
Munich, 80539
Germany

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