Operate, not Amputate: Rule 201 as an Example of a Surgical Approach to Dealing with Toxic Short Selling

Abstract

In this paper we provide a novel method for the evaluation of the Rule 201 (US short sale restrictions) using over two years of intraday data, carefully matching restricted and control assets, and separating local efects around the implementation from those over the remainder of the trading day. We nd that the Rule achieves its objectives: despite a 4% drop in volume, liquidity and volatility improve (the spreads fall by 7% and the range by 13%). Our analysis indicates that the restrictions achieve this by increasing the cost of short selling in a way that primarily a ects toxic short sellers.