Short-Selling Restrictions and Options Market-Maker Exemptions

Summary

The document asks how short-selling bans affect derivatives markets, especially futures, options, hedging, and market-making. Its substantive example concerns a 2008 SEC exemption that allowed options market makers to short sell for bona fide market-making activity. The cited restriction limited that exemption for new positions when the market maker knew a customer or counterparty was increasing an economic net short position.

This example shows that a ban or restriction can include targeted provisions for options market makers, while also constraining their short sales under specified circumstances. The document does not provide the requested studies or assess effects on futures, market liquidity, volatility, or hedging outcomes. It is therefore a narrow regulatory illustration rather than evidence of the overall market impact of short-selling bans.

Key ideas

• A 2008 SEC rule exempted options market makers from some short-sale restrictions for bona fide market-making activity.
• The exemption restricted new short positions when the market maker knew a counterparty was increasing an economic net short position.
• The example illustrates how short-sale rules can treat options market-making differently from other trading.
• The document offers no empirical assessment of effects on futures, market quality, or hedging.

Tags

# How did bans on short-selling affect the derivatives markets?


# How did bans on short-selling affect the derivatives markets?












Due to the ongoing turmoil in the financial markets a short-selling ban is being considered (again, one has to say, but this time in Europe): http://www.nytimes.com/2011/08/12/business/global/europe-considers-ban-on-short-selling.html

Aside from the point that this seems to serve purely political reasons (since it is pretty clear that short-selling is not the culprit, quite the opposite as a ban will most probably lead to even more market volatility) I have a different question:

Concerning the experience with past bans: How was the derivatives markets affected esp. futures and options? There will be studies out there, I hope. This is also interesting with respect to the question how important hedging with linear instruments really is for market makers.

## Answer by I-CJW (score 2, accepted)

https://quant.stackexchange.com/a/1659

In 2008, the SEC instituted an exemption for market makers to allow them to sell short for the purposes of bona fide activities related to market making in options. However, "for new positions, a market maker may not sell short if the market maker knows a customer or counterparty is increasing an economic net short position".

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