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

Yubin Li, Chen Zhao and Zhaodong Zhong
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Yubin Li: Southwestern University of Finance and Economics
Chen Zhao: Southwestern University of Finance and Economics

Review of Derivatives Research, 2016, vol. 19, issue 2, No 2, 113-146

Abstract: Abstract 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.

Keywords: Short-sale constraints; Regulation SHO; Short selling; Options trading volume (search for similar items in EconPapers)
JEL-codes: G10 G12 G18 G23 (search for similar items in EconPapers)
Date: 2016
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Citations: View citations in EconPapers (2)

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DOI: 10.1007/s11147-015-9117-4

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