Are shorts restricted when options are an option? Evidence from SEC Rule 201

57 Pages Posted: 17 Nov 2022

See all articles by Rainer Brand

Rainer Brand

affiliation not provided to SSRN

Matthias Molnar

Vienna University of Economics and Business - Institute for Finance, Banking and Insurance

Angel Tengulov

University of Kansas - School of Business

Date Written: October 1, 2021

Abstract

This paper investigates the effect of the current short-sale regulation, SEC Rule 201, on cross-market trading and its impact on market quality. The evidence suggests that after Rule 201 is triggered, shorting activity decreases and put option activity increases. Call option activity, option bid-ask spreads, and pressure on put option prices increase as well. This evidence is consistent with informed short sellers migrating from the equity market to the options market after short-sale restrictions become binding and contributes to a long-standing debate on the topic. Further, we document an increase in equity bid-ask spreads and equity price dispersion, indicative of deterioration in the market quality of the underlying stocks. The evidence highlights the need of additional disclosure requirements related to large synthetic short-sale positions through options.

Keywords: option markets, short-sale regulation, Rule 201, market quality, trader migration

JEL Classification: G12, G14

Suggested Citation

Brand, Rainer and Molnar, Matthias and Tengulov, Angel, Are shorts restricted when options are an option? Evidence from SEC Rule 201 (October 1, 2021). Available at SSRN: https://ssrn.com/abstract=4267574 or http://dx.doi.org/10.2139/ssrn.4267574

Rainer Brand

affiliation not provided to SSRN

Matthias Molnar

Vienna University of Economics and Business - Institute for Finance, Banking and Insurance

Welthandelsplatz 1
Vienna, 1020
Austria

Angel Tengulov (Contact Author)

University of Kansas - School of Business ( email )

1654 Naismith Dr
Lawrence, KS 66045
United States

HOME PAGE: http://www.angeltengulov.com/

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