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January 10, 2009

Reconsidering the Short-Selling Ban

I'm on the record as saying September 2008's short-selling ban instituted in many markets, including the U.S., was unnecessary and largely ineffective. Further, it caused collateral damage among quant funds, long short funds and others who were not targeting bank stocks in particular.

With the preceding in mind we are beginning to see papers appear on the subject, more or less saying the same thing: Market quality decreased, spreads widened and volatility worsened in non-shortable names. Mind you, politicians got to crow about it, so maybe we're using the wrong dependent variable here.

Sources:

• The Impact of Short Sales Restrictions. Ian W. Marsh and Norman Niemer
• Shackling Short Sellers: The 2008 Shorting Ban. Charles Jones, Ekkehart Boehmer and Xiaoyan Zhang

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