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

Author

Listed:
  • Yubin Li

    (Southwestern University of Finance and Economics)

  • Chen Zhao

    (Southwestern University of Finance and Economics)

  • Zhaodong Zhong

    (Rutgers University)

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.

Suggested Citation

  • Yubin Li & Chen Zhao & Zhaodong Zhong, 2016. "Migrate or not? The effects of regulation SHO on options trading activities," Review of Derivatives Research, Springer, vol. 19(2), pages 113-146, July.
    • Handle: RePEc:kap:revdev:v:19:y:2016:i:2:d:10.1007_s11147-015-9117-4
    DOI: 10.1007/s11147-015-9117-4
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    References listed on IDEAS

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    Cited by:

    1. Yi‐Wei Chuang & Wei‐Che Tsai & Pei‐Shih Weng & Chi Yin, 2021. "Do put warrants unwind short‐sale restrictions? Further evidence from the Taiwan Stock Exchange," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 41(3), pages 325-348, March.
    2. Tianyu Cai & Lixiong Guo & Yongxian Tan, 2024. "Short seller monitoring and real earnings management," The Financial Review, Eastern Finance Association, vol. 59(1), pages 203-225, February.

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    More about this item

    Keywords

    Short-sale constraints; Regulation SHO; Short selling; Options trading volume;
    All these keywords.

    JEL classification:

    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation
    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors

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