Trading System Upgrades and Short-Sale Bans: Uncoupling the Effects of Technology and Regulation

We examine the market quality effects of technology upgrades juxtaposed with short-sale bans. Between 2011 and 2013, the Spanish Stock Exchange introduced a smart trading platform (SIBE-Smart) and colocationto facilitate high-speed trading, and they also imposed two short-sale bans. We find that the SIBE-Smart introduction, which occurs between the two short-sale bans, leads to reduced market quality. The introduction of colocation, which occurs during the second short-sale ban, improves market liquidityalthough it does not attract additional high-speed trading. Our results highlight how the effects of latency-reducing infrastructure improvements depend on, and differ across, different regulatory regimes.