The short-selling ban on 34 UK financial stocks, imposed by the Financial Services Authority (FSA) on 18 September last year, resulted in a “statistically significant deterioration in liquidity” in the 15 FTSE 100 shares affected by the restrictions, according to a study commissioned by the London Stock Exchange (LSE).
The study, conducted by Matthew Clifton and Mark Snape of the Capital Markets Cooperative Research Centre, a research facility backed by the Australian federal government, showed that the daily time-weighted average spread in the 15 banned stocks increased by 140% from 15 basis points to 36 bps between 19 September and 30 October 2008. The spreads for a control group of 78 FTSE 100 stocks not subject to the shorting ban only grew by 56% from 13 bps to 20 bps over the same period. The average spread for both groups of stocks held steady in the pre-ban periods measured by the study (23 June to 5 August and 6 August to 18 September).
The study also found that the affected stocks fared worse than the control group in a number of other liquidity measures during the ban. Market depth on the LSE in the restricted stocks tumbled by 59%, compared with a 43% drop in the control group. Number of trades and share volume declined 10% in the affected stocks, while they increased by 50% in the control group. And turnover in affected stocks slipped by 21%, compared with a 42% rise in turnover for the control group.
The study performed two separate regression analyses, which demonstrated that the liquidity declines occurred independently of market-wide changes and increased volatility.
“Our research suggests that the ban on short-selling did in fact impair liquidity provision and market quality in affected securities – this increases the cost of investing in equities,” said Adam Kinsley, director of regulation at the LSE, in a statement. Referring to the FSA’s recent decision to lift the short-selling ban and extend the requirement to disclose significant short positions, he added, “The FSA has reviewed the impact of its temporary short-selling measures, and should be applauded for its balanced approach and proposals.”