Publication Date



We examine the effects of two juxtaposed events – regulatory short sale bans and exchange efforts to facilitate high-frequency trading (HFT) – on multiple dimensions of market quality. Between 2011 and 2013, the Spanish Stock Exchange (SSE) launched a smart trading platform (SIBE-Smart) and introduced colocation facilities to attract HFT. During this time two short sale bans were imposed on the SSE. Comparing the market before and after these events, we find that while SIBE-Smart attracts some HFT, colocation does not. However, following both of these events, liquidity and price efficiency decline. Colocation, implemented during the second ban, is accompanied by an across-the-board deterioration in market quality. Strikingly, SIBE-Smart, which precedes a ban, also brings significant reductions in market quality. These results are in contrast to existing studies that show increased HFT resulting from technological inducements. We conclude that the beneficial effects of HFT on liquidity and price efficiency are negated in the presence of regulatory restrictions on trading.


Required Publisher Statement
Copyright held by the authors.

This work has been revised and published as: Chakrabarty, B., Moulton, P. C., & Pascual, R. (2017). Trading system upgrades and short-sale bans: Uncoupling the effects of technology and regulation. Journal of Empirical Finance, 43, 74-90. doi:10.1016/j.jempfin.2017.05.004. The updated version is available here.