The Securities and Exchange Commission (SEC) issued an order earlier today restricting short selling on 799 financial companies affective immediately. While the order provided an exemption for option market makers for today’s options expiration, it did not include a general exemption for market makers as had previous emergency orders restricting naked short selling.
Options industry officials say the consequences may be dire. Wayne Luthringshausen, chairman and CEO of The Options Clearing Corporation (OCC), said in a statement, “The (OCC) is extremely concerned about the potentially disastrous effects on U.S. listed options markets resulting from the SEC’s Emergency Order banning short sales. OCC understands the need to curb abusive practices involving short selling, however, as written, this order does not allow for an Options Market Maker exemption to ensure liquid and orderly markets starting on Monday. This will have dire consequences on the US equities markets.”
Chicago Board Options Exchange (CBOE) Chairman and CEO William J. Brodsky said in a statement released Friday afternoon, “It is difficult to comprehend the merits of a draconian measure that will result in the sudden and severe removal of liquidity from the marketplace at the same time that the government is taking unprecedented steps to preserve it.”
Ron Ianieri, chief market strategist for Options University, says, “This is a dramatically dangerous situation.”
Ianieri goes on to say that the bid/ask spread will widen dramatically as a result of option market makers not being able to hedge short put positions by hedging the underlying stock.
He also added that it could cause a crash once the equity markets turns lower. When the market goes down, the only people who are buying are the shorts who are taking profits. If you take the shorts out of the market, you set up a situation where the next sell-off is much more severe. He adds, “There will be no one to buy on the way down.”
Ianieri points out that the short sellers did not cause the problem. “All the short sellers did was see an opportunity because these guys were losing money and over leveraged in vehicles that never should have been created in the first place. They are trying to blame the guys who dug the grave for the murder.”
Brodsky is in Washington Friday afternoon trying to reverse the SEC’s decision. He said in the release, “The lack of relief for options market makers will have serious ramifications for the reliability of the options market and for the efficiency of our capital markets overall.”
