| Abstract: | Despite its sizeable compliance costs, we are unable to document any clear benefits of SEC Rule 201 in ensuring fair valuations and price stability, promoting higher liquidity and execution quality, or preventing a sudden flash crash or prolonged market crises. Our daily and intraday analysis of data both before and after Rule 201 finds that short sellers are naturally more active before the occurrence of negative returns, not after significant price declines. Our simulation results show that Rule 201 further curtails short selling during normal periods, but is not binding on short sellers during the volatile period of the 2008 financial crisis. |
