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Journal of Financial Economics Vol. 124 No. 1 2017

High frequency trading and the 2008 short-sale ban

Jonathan Brogaard1; Terrence Hendershott2; Ryan Riordan3

1 University of Washington · 2 University of California, Berkeley · 3 Queen's University

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.

DOI
10.1016/j.jfineco.2017.01.008
Volume
124
Issue
1
Pages
22-42
Language
en
Sources
bibtex:phds-export.bib openalex crossref

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