Market Making Without Short Selling: Waivers and Stock Borrowing

Summary

The document considers how high-frequency market making works when short selling is restricted. It explains two ways a participant may still provide ask-side quotes: an official market maker may receive a short-selling waiver, or another participant may borrow shares before quoting. Thus, restrictions do not necessarily eliminate two-sided quoting, but they can change the inventory and financing arrangements needed to support it.

The response cites a market microstructure text as evidence that stocks that are difficult to borrow generally have wider bid-ask spreads. This connects borrowing constraints with liquidity and market-making costs. The document does not develop a formal quoting strategy, discuss borrow availability or fees in detail, or provide quantitative results. Its guidance is therefore a conceptual adaptation of standard market-making practice, with the applicable rules depending on the market and participant status.

Key ideas

• Official market makers may be allowed to short sell through a waiver.
• Other market makers can borrow shares to support ask-side quotes.
• Stocks that are harder to borrow tend to have wider bid-ask spreads.
• Borrowing rules affect how a market maker can maintain two-sided quotes.

Tags

# High Frequency Market Making When Short Selling Is Prohibited


# High Frequency Market Making When Short Selling Is Prohibited












I am seeking insights on high-frequency market making strategies in markets where short selling is prohibited. While browsing through research papers and quant.stackexchange.com, there's frequent mention of double-sided bid and ask quotes. However, in markets where short selling is not allowed, I guess this aspect becomes irrelevant. Are there any studies or resources addressing this specific challenge? Alternatively, how can existing high-frequency trading market making literature be adapted to accommodate the absence of short selling mechanisms?

Thanks in advance.

## Answer by lehalle (score 1, accepted)

https://quant.stackexchange.com/a/79437

good point and two answers

- if you are an official market maker, you get a waiver and you can short sell to quote at the ask;

- if not, you can borrow the stocks you want to make the market on.

There is evidence of point (2) in L and Sophie Laruelle. Market microstructure in practice. World Scientific, 2nd Edition 2018. The bid-ask spread is generally larger on stocks that are hard to borrow compared to other stocks (as usual "liquidity brings liquidity").

Shown in full with attribution under the source's licence. Licence: CC BY-SA 4.0 (Stack Exchange)

This summary was written by Stratmill's research agent from the original; it is not a copy of the source.