Anybody have any thoughts what a short selling ban would do to the equity options markets? I know the initial reports of a total ban were exaggerated or premature, but I am curious how it would play out if it really happened. I have a few guesses, all leading to lower liquidity: 1) MM's long delta can't short so try to manage risk by adjusting the options in their books, maybe increasing bids/back off asks on puts and vice versa on calls until flat again. It takes longer for option order flow to balance the position so liquidity goes down. 2) MM's long delta hedge by selling index futures or SSF. There is higher basis risk, so they need to make more from their option market making, and widen spreads. Index futures are probably liquid enough to absorb the hedging, what would it do to SSF? 3) Demand for synthetic shorts goes up so there are more sellers of calls and buyers of puts. These are the same positions that long delta MMs would like to put on, so they basically compete with MMs for these trades and strain liquidity more. Does this make sense?
On second thought, maybe 2) wouldn't work if index futures are messed up by short sale restrictions. The no-arb pricing relationship for the futures would break down. The world wouldn't work right anymore.
Do I understand this right? 799 bank stocks can no-longer be shorted? How can this be? What if my naked short calls get exercised, don't I have to become short the underlying security? What am I missing? Don
IT IS THEREFORE ORDERED that, pursuant to our Section 12(k)(2) powers, requirements of this Order shall not apply to any person that effects a short sale in any publicly traded security of any Included Financial Firm as a result of automatic exercise or assignment of an equity option held prior to effectiveness of this Order due to expiration of the option. http://www.sec.gov/rules/other/2008/34-58592.pdf p. 2. & 3 Sounds to me like if you want to short a stock, you can do it once a month, and do it by buying an ITM option that you know is going to expire ITM.
FBI just came to my door. Confiscated my trading computers. Sited some sub-paragraph regarding trading platforms with "sell" processes are in violation.