At the height of the COVID-19 related market stress in March 2020, six European countries jointly implemented market-wide short selling bans. Utilizing regulatory data on share trading volumes and short positions, and complementing existing literature, researchers from the European Securities and Markets Authority (ESMA) conducted a comprehensive analysis of these bans.
Based on a difference-in-difference approach, their estimation finds that the 2020 short selling bans are associated with a deterioration in liquidity and trading volumes, and a decrease in volatility. They do not find evidence that the bans supported nor harmed the prices of banned shares over the application period.
Remarkably, the negative impact on liquidity persisted even after the bans were lifted. The deterioration of liquidity appears stronger for shares deemed as liquid, i.e., more pronounced for large-cap stocks, highly fragmented stocks, and stocks with listed derivatives.
Sectoral effects are observed for the stocks most affected by the market stress, namely the healthcare and the consumer cyclical sectors. Shares already shorted before the bans saw stronger declines in liquidity and volatility, implying a more challenging price discovery process. Finally, no evidence of a displacement effect between banning and non-banning jurisdictions was observed.