Beware of the Spider : Exchange Traded Funds and the 2008 Short-Sale Ban

This paper examines the effects of the 2008 short-sale ban on exchange traded funds (ETFs). Short sales of banned stocks decreased significantly during the ban period. However, we demonstrate that a portion of that decrease was reabsorbed by financial-sector ETFs and the biggest and most liquid ETF - the S&P 500 Spider. We argue that short selling equity ETFs was a viable method of circumnavigating the ban. Additionally, we offer evidence that the supply of ETF shares available for lending was able to be increased rapidly to meet the demand through ETFs' unique creation mechanism (“create-to-lend”)