th
Discussion by Ian Marsh, Cass
Business School

• For once academics largely agree on a topic
• Short sales are a good thing since in theory they improve market efficiency, are integral to key asset pricing models, prevent bubbles and may even prevent crashes
• Empirical evidence is also largely supportive of this view
• But most of this literature is based on financial markets in normal times

• Recent regulatory moves on short selling have been made in distinctly non-normal times
• Arturo’s paper focuses on the SEC Emergency
Order brought in July 15 th , effective July 21-
August 15 th , 2008
• Norman Niemer and I wrote a paper in
November 2008 looking at the effects of the global tightening of short sales constraints mid-September 2008

• Bris, Goetzmann and Zhu (JFin, 2007)
– X-sectional and time series evidence from 46 countries 1990-2001
• Bris (2008)
– G19 through time and against control groups of US FIs and non-US FIs
• Marsh and Niemer (2008)
– 17 countries, varying levels of SS restrictions, before and after restrictions, restricted and unrestricted firms

• Compare returns distributions of (financial) firms subject to SS restrictions to returns of
1. Those same firms before the restrictions (so differing by time period analysed)
2. Firms not subject to the restrictions (so differing by type of firm but same time period)
3. Financial (and NF) firms in different jurisdictions
(so differing by nationality but same type of firm, same period)
• None of these are ideal

• Average returns and volatilites
– Arguably the reason why regulators intervened
– Not obvious that SS restrictions have much impact
• Skewness and kurtosis of returns
– Crash risk measures
– Probable that SS restrictions might be detected here
• Market efficiency
– Expected cost of SS restriction is reduction in market quality

• Arturo finds that
– an increase in short interest reduces returns
– Relatively poor performance of G19 stocks is not due to short selling, but rather dismal operating performance
• Norman and I find that:
– Returns on portfolio of US financial stocks significantly worse after ban on SS
– Poor but not abnormal (compared to rest of 2008) for UK financials

• Arturo finds:
– Volatility increases 150% after EO
• We find:
– UK and US financials subject to SS ban saw huge increases in volatility
– Non-financials also saw significant increases from a lower starting level to a lower ending level
– Return and volatility patterns are repeated globally, including France and Germany where restrictions were less binding, and Japan and Sweden where restrictions were unchanged

U.K.
U.S.
Germany
Sweden
Restricted
Before After
Unrestricted
Before After
2.50% 5.89% 1.50% 3.70%
(100%) (100%)
2.72% 6.08% 1.64% 2.98%
(99%) (83%)
2.13% 7.09% 0.81% 2.90%
(100%) (100%)
2.65% 7.49% 1.62% 4.37%

• While vols and returns change around the EO and the September ban it is hard to link these to short selling activities or regulatory changes
• Bad news is (eventually) priced by the equity markets
• There was a lot of bad news about for markets to price during 2008

• BGZ:
– Skewness is positive and larger in the presence of SS restrictions
– Large negative returns are no more frequent if SS allowed
– Shorting associated with extreme returns that become more negative not more frequent negative returns
• Marsh-Niemer:
– Changes in skew not systematic
– Skew is not at all unusual post ban
– Kurtosis is generally lower post ban (not UK financials) but this is true for all companies and irrespective of nature of the restrictions

U.K.
U.S.
Germany
Sweden
Restricted
Before After
0.68
0.77
(68%)
0.85
0.49
0.15
0.48
(56%)
0.3
(62%)
0.54
Unrestricted
Before After
0.24
0.2
(64%)
0.19
0.2
-0.64
-0.26
(61%)
1.3
(80%)
0.63

U.K.
U.S.
Germany
France
Sweden
Restricted
Before After
0.85
1.68
(55%)
1.99
2.47
1.47
(55%)
2.51
6.96
4.06
(41%)
-0.64
(2%)
0.45
Unrestricted
Before After
0.09
-0.21
(11%)
0.34
5.97
-0.67
(17%)
4.12
6.15
1.8
(57%)
0.54
(15%)
0.42

• BGZ:
– R2 and cross-autocorrelation results suggest SS allow faster impounding of bad news into prices
• Arturo:
– Quoted spreads increased for G19 stocks after EO much more than for unaffected stocks
– BGZ-style indicators indicate decline in efficiency after
EO, very slightly more so for G19
• Marsh-Niemer:
– No impact of SS ban on autocorrelations

• BGZ suggest some support for regulator view that SS restrictions reduce negative skewness of returns but this comes at the cost of lower market quality
• Bris and Marsh-Niemer find that while market quality has declined across regulatory changes it doesn’t appear to be caused by the changes
• And the changes didn’t seem to alter returns distributions

• To me, the surprise is that SS restrictions had such little effect on market quality
• Reasons:
1. Small samples
2. Effect of restrictions swamped by event effects
3. Other ways of taking short bets on stocks had emerged (eg CDS)

• Arturo
– Looking at stock lending activities globally
– Interesting preliminary results suggesting strategic stock lending
• Me
– Looking at liquidity provision at microstructure level
– By far the strongest result I saw relating to Sept08 was the decimation of trading volume after the ban