The 2020 European short-selling ban and the effects on market quality

Responding to the dramatic price declines during the Covid-19 pandemic, six European countries introduced short-selling bans in March 2020. We analyze how these restrictions affected the market quality by comparing countries with and without bans. We observe for ban countries relatively lower market liquidity, lower trading volume, and wider bid-ask spreads. Moreover, regulators' aim to prevent price declines and reduce volatility failed, as ban and no-ban countries reveal no differences and prices increased. Our results clearly detail the negative market-quality effects resulting from restrictions, especially for smaller markets and firms. Consequently, this regulatory interference did not protect but harmed investors.

Automated summary

Six European countries introduced short-selling bans in response to the dramatic price declines during the Covid-19 pandemic, aiming to prevent further price drops and reduce volatility. However, these restrictions did not achieve their intended goals and instead resulted in negative effects on market liquidity, trading volume, and price spreads, particularly impacting smaller markets and firms. In conclusion, this regulatory interference did not protect investors, but rather harmed them.