Short Selling Equity Exchange Traded Funds and its Effect on Stock Market Liquidity

Egle Karmaziene, Valeri Sokolovski

Research output: Working paper / PreprintWorking paperProfessional


We examine short selling of equity exchange traded funds (ETFs) using the September 2008 short-sale ban. Contrasting the previously-documented contractions in other bearish strategies, we demonstrate that during the ban the short sales of the largest and the most liquid ETF, the S&P 500 Spider, significantly increased. We offer evidence that it was driven primarily by short sellers circumnavigating the ban. We also document a concurrent increase in the supply of ETF shares suggesting that they can be created to accommodate short-sales. Additionally, we show that the detrimental effect of regulatory short-sale constraints on stock liquidity was up to 10% less severe for the constituents of the Spider. Our results suggest that short-sales of ETFs are a viable substitute for directional short-sales of individual stocks. They also highlight a novel channel through which ETFs can have a positive effect on the liquidity of its underlying securities.
Original languageEnglish
Publication statusPublished - 2019

Publication series

NameSwedish House of Finance Research Paper Series

Bibliographical note

R&R at Journal of Financial and Quantitative Analysis


  • exchange traded funds
  • regulatory arbitrage
  • financial crisis
  • SEC
  • ETF
  • short selling ban

Cite this