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In response to the market volatility that arose when the pandemic first hit, certain European regulators temporarily banned short-selling. New research finds that the controversial move had mixed effects on the market.

The European Securities and Markets Authority (ESMA) published a report that reviews the impact of short-selling bans that were adopted in the face of severe market stress in March 2020.

The bans were introduced by six regulators on a coordinated basis in an effort to limit downward price spirals.

ESMA’s post mortem on the effects of the ban finds that they led to reduced liquidity and wider bid-ask spreads for equities in jurisdictions that adopted the ban. In particular, spreads increased by 7.5 % for stocks in banned jurisdictions during the restriction.

The review also found that the deterioration of liquidity was more pronounced for large-cap stocks, highly fragmented stocks, and stocks with listed derivatives, “pointing towards stronger effects for shares deemed as liquid.”

At the same time, the research found that “shares in banned countries exhibited a lower degree of volatility during the ban period.”

It also found no statistically significant correlation with abnormal returns, suggesting that the bans didn’t harm, or help prop up stock prices; nor did they drive trading activity between markets.

“[A]ccording to the analysis of net short positions data across European jurisdictions, the bans did not entail substantial displacement effects from non-banning to banning jurisdictions,” it concluded.