The options market maker exception to SEC Regulation SHO
AbstractUntil 2008, options market makers engaged in bona fide market making were exempt from locate and certain close-out requirements for short sales (the “Exception”). This Exception applied only to short sales that qualified as bona fide hedges of options positions that were established before a stock went on the SEC Regulation SHO Threshold List. In this paper we examine the consequences of eliminating this close-out Exception. Specifically, we test the hypothesis that eliminating the Options Market Maker Exception to SEC Regulation SHO reduced the incentive to naked short sell stocks through the options market. We compare data from the second and fourth quarters of 2008. Consistent with our predictions, we find that eliminating the Exception led to fewer fails-to-deliver and higher stock borrow rates for optionable stocks as compared to non-optionable stocks. Further, removing the Exception reduced fails-to-deliver for optionable stocks when the price of borrowing stock was high. Finally, options market trading volume declined after the Exception was eliminated.
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
As the access to this document is restricted, you may want to look for a different version under "Related research" (further below) or search for a different version of it.
Bibliographic InfoArticle provided by Elsevier in its journal Journal of Financial Markets.
Volume (Year): 16 (2013)
Issue (Month): 2 ()
Contact details of provider:
Web page: http://www.elsevier.com/locate/finmar
Options market maker; Naked short selling; Securities lending; Regulation SHO; Securities and Exchange Commission;
Find related papers by JEL classification:
- G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
- G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation
- G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Owen A. Lamont & Richard H. Thaler, .
"Can the Market Add and Subtract? Mispricing in Tech Stock Carve-outs,"
CRSP working papers
528, Center for Research in Security Prices, Graduate School of Business, University of Chicago.
- Owen A. Lamont & Richard H. Thaler, 2003. "Can the Market Add and Subtract? Mispricing in Tech Stock Carve-outs," Journal of Political Economy, University of Chicago Press, vol. 111(2), pages 227-268, April.
- Owen A. Lamont & Richard H. Thaler, 2001. "Can the Market Add and Subtract? Mispricing in Tech Stock Carve-Outs," NBER Working Papers 8302, National Bureau of Economic Research, Inc.
- A. Colin Cameron & Jonah B. Gelbach & Douglas L. Miller & Doug Miller, 2009.
"Robust Inference with Multi-way Clustering,"
98, University of California, Davis, Department of Economics.
- Boulton, Thomas J. & Braga-Alves, Marcus V., 2010. "The skinny on the 2008 naked short-sale restrictions," Journal of Financial Markets, Elsevier, vol. 13(4), pages 397-421, November.
- Duffie, Darrell & Garleanu, Nicolae & Pedersen, Lasse Heje, 2002. "Securities lending, shorting, and pricing," Journal of Financial Economics, Elsevier, vol. 66(2-3), pages 307-339.
- Edwards, Amy K. & Hanley, Kathleen Weiss, 2010. "Short selling in initial public offerings," Journal of Financial Economics, Elsevier, vol. 98(1), pages 21-39, October.
- Danielsen, Bartley R. & Sorescu, Sorin M., 2001. "Why Do Option Introductions Depress Stock Prices? A Study of Diminishing Short Sale Constraints," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 36(04), pages 451-484, December.
- Diamond, Douglas W. & Verrecchia, Robert E., 1987. "Constraints on short-selling and asset price adjustment to private information," Journal of Financial Economics, Elsevier, vol. 18(2), pages 277-311, June.
- Jones, Charles M. & Lamont, Owen A., 2002.
"Short-sale constraints and stock returns,"
Journal of Financial Economics,
Elsevier, vol. 66(2-3), pages 207-239.
- Pontiff, Jeffrey, 1996. "Costly Arbitrage: Evidence from Closed-End Funds," The Quarterly Journal of Economics, MIT Press, vol. 111(4), pages 1135-51, November.
- Boni, Leslie, 2006. "Strategic delivery failures in U.S. equity markets," Journal of Financial Markets, Elsevier, vol. 9(1), pages 1-26, February.
- Richard B. Evans & Christopher C. Geczy & Adam V. Reed, 2009. "Failure Is an Option: Impediments to Short Selling and Options Prices," Review of Financial Studies, Society for Financial Studies, vol. 22(5), pages 1955-1980, May.
- Mark Mitchell & Todd Pulvino & Erik Stafford, 2002. "Limited Arbitrage in Equity Markets," Journal of Finance, American Finance Association, vol. 57(2), pages 551-584, 04.
- Karl B. Diether & Kuan-Hui Lee & Ingrid M. Werner, 2009. "Short-Sale Strategies and Return Predictability," Review of Financial Studies, Society for Financial Studies, vol. 22(2), pages 575-607, February.
- Michael J. Fleming & Kenneth D. Garbade, 2002. "When the back office moved to the front burner: settlement fails in the treasury market after 9/11," Economic Policy Review, Federal Reserve Bank of New York, issue Nov, pages 35-57.
- Lecce, Steven & Lepone, Andrew & McKenzie, Michael D. & Segara, Reuben, 2012. "The impact of naked short selling on the securities lending and equity market," Journal of Financial Markets, Elsevier, vol. 15(1), pages 81-107.
- Geczy, Christopher C. & Musto, David K. & Reed, Adam V., 2002. "Stocks are special too: an analysis of the equity lending market," Journal of Financial Economics, Elsevier, vol. 66(2-3), pages 241-269.
- Eric C. Chang & Joseph W. Cheng & Yinghui Yu, 2007. "Short-Sales Constraints and Price Discovery: Evidence from the Hong Kong Market," Journal of Finance, American Finance Association, vol. 62(5), pages 2097-2121, October.
- Thompson, Samuel B., 2011. "Simple formulas for standard errors that cluster by both firm and time," Journal of Financial Economics, Elsevier, vol. 99(1), pages 1-10, January.
- Charles M. Jones, 2012. "Shorting Restrictions: Revisiting the 1930s," The Financial Review, Eastern Finance Association, vol. 47(1), pages 1-35, 02.
- Robert Battalio & Paul Schultz, 2011. "Regulatory Uncertainty and Market Liquidity: The 2008 Short Sale Ban's Impact on Equity Option Markets," Journal of Finance, American Finance Association, vol. 66(6), pages 2013-2053, December.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Zhang, Lei).
If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.
If references are entirely missing, you can add them using this form.
If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.
If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.
Please note that corrections may take a couple of weeks to filter through the various RePEc services.