It's Sho Time! Short-Sale Price-Tests and Market Quality

Diether, Karl B.; Lee, Kuan‐Hui; Werner, Ingrid M.

doi:10.2139/ssrn.910614

Cited by 110 publications

(92 citation statements)

References 31 publications

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“…McCormick and Reilly (1996) find that Rule 3350 curtails short selling for NASDAQ NMS stocks during declining markets. Diether et al (2009) show that pilot stocks listed on both the NYSE and NASDAQ experienced a significant increase in short selling activities during the pilot program. These stocks had more frequent shortsale trades and a greater short-sales-to-share volume ratio during the pilot program.…”

Section: Rule 202t: Eliminating Short-sale Price Testsmentioning

confidence: 95%

“…Short selling is an important fraction of the stock trading activity. For example, Diether et al (2009) find that short sales represent 31 % of share volume for NASDAQ-listed stocks and 24 % of share volume for NYSE-listed stocks in 2005.…”

Section: Short Sellingmentioning

confidence: 99%

“…The remaining Russell 3000 Index securities were control stocks. Prior studies show that the exemption from short-sale price tests decreases the costs of short selling in the pilot stocks relative to the control stocks (see US Securities and Exchange Commission 2007;Diether et al 2009). We confirm this finding in our sample.…”

Section: Introductionmentioning

confidence: 99%

“…Evans et al (2009Evans et al ( , p. 1975 describe Rule 203 (the locate and delivery requirements of Regulation SHO) as follows: "it has the potential to alter the cost of short exposure, so its impact is an important new empirical question." However, prior research of Regulation SHO mainly focuses on the pilot program of Rule 202T (e.g., US Securities and Exchange Commission 2007; Alexander and Peterson 2008;Diether et al 2009), the effects of Rule 203 are largely ignored. To the best of our knowledge, we are the first to examine the effects of the initial adoption of Rule 203 on the equity options markets.…”

Section: Introductionmentioning

confidence: 99%

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Migrate or not? The effects of regulation SHO on options trading activities

Zhao

Zhong

2015

Rev Deriv Res

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In this study, we investigate the effects of stock short-sale constraints on options trading by exploiting two US Securities and Exchange Commission rule changes under Regulation SHO: Rule 203 (locate and close-out requirements) and Rule 202T (temporary removal of short-sale price tests). We find that stock short selling activities decrease (increase) significantly after Rule 203 (Rule 202T) implementation, supporting the validity of Rule 203 (Rule 202T) as an exogenous increase (decrease) in short-sale constraints. Options volume increases significantly after Rule 203 went into effect and the result is more pronounced among firms with lower levels of institutional ownership and smaller options bid-ask spreads. Therefore, the evidence from Rule 203 suggests that investors may use options as substitutes for stock short sales when short selling is less feasible or more costly due to the locate and delivery requirements. In contrast, we find no significant change in the options trading volume of pilot stocks during the pilot program of Rule 202T. Overall, our results indicate that the impact of short-sale constraints on options trading varies with the types of constraints affected.

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Section: Rule 202t: Eliminating Short-sale Price Testsmentioning

confidence: 95%

Section: Short Sellingmentioning

confidence: 99%

Section: Introductionmentioning

confidence: 99%

Section: Introductionmentioning

confidence: 99%

See 2 more Smart Citations

Migrate or not? The effects of regulation SHO on options trading activities

Zhao

Zhong

2015

Rev Deriv Res

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show abstract

“…As far as we are aware, there is little empirical or theoretical evidence on how short sale constraints affect liquidity. Alexander and Peterson (2008) and Diether, Lee, and Werner (2009a) are the only exceptions, and examine the impact of short sale price tests on market liquidity. This paper adds to the limited evidence of the impact of short sale constraints on liquidity, in addition to examining the impact of naked short selling on returns and volatility.…”

Section: Introductionmentioning

confidence: 99%

The impact of naked short selling on the securities lending and equity market

Lecce

Lepone

McKenzie

et al. 2012

Journal of Financial Markets

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How Informed Investors Take Advantage of Negative Information in Options and Stock Markets

Kang

Park

2014

Journal of Futures Markets

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We examine whether and how investors establish positions in options when they have negative information in the U.S. markets from August 2004 to January 2009. Our empirical results show that options seem to be actively and effectively used for the exploitation of negative information. General trading volumes and bid–ask spreads of options remarkably increase like those of stocks as the short sellers increase their selling pressure. Notably, we find that the difference between a stock's traded price and its implied price from the options market reaches its peak about 2 weeks before the short sale trading activity reaches its peak. We also observe that synthetic short positions measured by this difference are preferred over OTM put positions by investors with negative information. Finally, economically significant returns based on a strategy using the difference in the traded and implied stock prices as a trading signal support our evidence. Moreover, these profits confirm the findings of the previous research which argue that options are shelters for informed investors. © 2014 Wiley Periodicals, Inc. Jrl Fut Mark 34:516–547, 2014

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It's Sho Time! Short-Sale Price-Tests and Market Quality

Cited by 110 publications

References 31 publications

Migrate or not? The effects of regulation SHO on options trading activities

Migrate or not? The effects of regulation SHO on options trading activities

The impact of naked short selling on the securities lending and equity market

How Informed Investors Take Advantage of Negative Information in Options and Stock Markets

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