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High frequency trading and the 2008 short-sale ban

Author

Listed:
  • Brogaard, Jonathan
  • Hendershott, Terrence
  • Riordan, Ryan

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.

Suggested Citation

  • Brogaard, Jonathan & Hendershott, Terrence & Riordan, Ryan, 2017. "High frequency trading and the 2008 short-sale ban," Journal of Financial Economics, Elsevier, vol. 124(1), pages 22-42.
  • Handle: RePEc:eee:jfinec:v:124:y:2017:i:1:p:22-42
    DOI: 10.1016/j.jfineco.2017.01.008
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    References listed on IDEAS

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    Cited by:

    1. Hautsch, Nikolaus & Noé, Michael & Zhang, S. Sarah, 2017. "The ambivalent role of high-frequency trading in turbulent market periods," CFS Working Paper Series 580, Center for Financial Studies (CFS).
    2. repec:eee:empfin:v:43:y:2017:i:c:p:74-90 is not listed on IDEAS

    More about this item

    Keywords

    High frequency trading; Short selling; Liquidity;

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors

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