A couple of people have asked me to clarify this. 1) We were exempted from the shorting rule on this past expiration Friday. But as of Monday, we were to be held to the same law as everyone else. It appears this we will continue to be able to short come Monday. 2) Why would it be as easy as shooting dead fish in a barrel if options MMs were not able to short the underlying? Many people don't understand that when you become an options MM, you take on a great deal of responsibility. For now, I am going to talk about the one that matters in this case. We have to mass quote 60% of the strike lines to be compliant. That is one of the things you sign up for if you become an options MM at the CBOE. Different exchanges have other rules in addition to that one. For example, at the ISE, they have the rule that MMs must participate on the open and close on stocks options they are responsible for. Now, the public [institutions, prop traders, retail traders, hedge funds, etc] trades options for many reasons. Some use them to trade directionally, but instead of using the underlying, they use options because it gives them even more leverage. Others trade options the way they were meant to be traded, as an asset class representing volatility. That means that the reason for trading options is not to take directional risk, but in fact to mitigate that risk as much as possible and concentrate instead on trading the volatility of the underlying for the life of that options(s) contract. So the the reason we are options MMs and not ETF MMs, or equity MMs, or whatever, is that in general we DO NOT take directional risk. We take on lots of other risk, vega, gamma, theta, rho, etc, but delta is kept in check. Ok now, say you don't allow me to short stock. I am a market maker in say, CELG. CELG has a new drug that promises to cure blood cancer. Everyone on the planet believes this is crazy and buys puts from me. Remember, I am FORCED to quote 60% of the strikes line. People are hitting my quotes like mad - You are shootting a dead fish in a barrel. So now I am short say 100,000 puts on CELG, and I am not able to hedge my directional risk to the downside because I can't short stock! As you may recall, 100,000 puts is the equivalent of a 10,000,000 short position in the CELG equity, since 1 option controls 100 shares of the underlying [at least in the US]. The results of the CELG tests are announced. In fact CELG does not have a cure for blood cancer, and the stock gaps down $30. They call an ambulance and I am carried out on a stretcher because I just obliterated my account [to say nothing of my clearing firm, since that was one of my positions of say in fifty to a hundred other underlyers, all also unhedged to the downside.] This scenario would become almost a weekly event on most options exchanges if option MMs are not exempted from the short rule. So you see, we are allowed to take on this massive leverage because we are supposed to be masters of directional risk management. In fact, the above scenario would never happen, since the clearing firm is monitoring your risk constantly and would ask you to bring your risk to acceptable levels based on your account size, or would forcibly close your positions and escort you off the floor. So instead, I would simply be shut down, since it is impossible to bring it to acceptable levels since I can't short stock. I could buy puts from someone else, but then THAT guy can't hedge. The point is, if I wanted to take directional risk, I would not be an option MM. I could do that just fine in the underlying. nitro
Doesn't the ban only apply to selling short stock? If so, market neutral Hedge funds can still use single stock futures as a substitute for selling short.
The world was a different place the day Bush took office. Your all his bitches and he has raped and plunder your once great country into a socialist dictatorship. Actually it wasn't him (he's just a moron) but his Daddy and their oil company friends an Cheney are the true villains.
Actually, I think the option market makers should be as screwed as everyone else and not be allowed to short the 800 financial stocks either. That way, the SEC and the powers that can be will get a taste of their own medicine when people start walking away from this market entirely. This banning of short selling is unpatriotic, communist, un-American, and generally detestable.
If you say that, you did not understand one word of what was said in the rest of the 500 words that you left out from that post in your quote of me. nitro
without short selling there is nothing that prevents total return swap in stocks from gaining strength. if they develop a clearing house then even more. of course then the SEC will claim they should regulate those
Oh I definitely understand. But having exceptions for some draconian rule is just another way to screw up our capital markets. If they want to play this way, then everyone should get to play.