Options: SEC ban, Market-makers & hedges, Short squeeze
OCC also appreciates and 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.
In the UK, the FSA ban on short sales does provide market maker relief. The lack of such relief in the SEC order will harm a marketplace that a great many investors have come to rely on to manage risk in their equity portfolios.
In other words: WTF were you thinking?
Options market makers would have been prohibited from making short sales starting next week under the ban adopted today to keep speculators from driving down stock prices. The Options Clearing Corp., which guarantees all trades exchange- listed options, said a ban would have proved “disastrous.”
Under rule announced today, market-makers such as Interactive Brokers Group Inc. and Susquehanna International Group LLP would be unable to short a stock to hedge their risks when clients buy or sell options on financial shares.
“For our retail customers, the costs of adjusting their portfolio has gone through the roof, because the bid-ask spreads have gone through the roof,”
Unintended consequences.
- Daily Options Report (Aug ‘07 post, but relevant): The Bernanke Short Options Squeeze
Which brings us to Friday. Gamma is essentially infinity in the SPX August options. They have stopped trading. They are merely cashed out at the “opening” price. The rate cut and market pop comes an hour and change ahead of the open. All a call short can do to defend his position is chase futures/ETF’s up. Some OTM calls he is short now have a 100 delta between now and the open. Sure there is an offsetting long that can sell the futures/ETF’s, but who has the urgency here? Clearly the squeezed short. And thus the kindling wood lit by the Bernanke match.
Throw in a similar dymamic on all other index/ETF options that expire at the end of the day, and Big Ben literally found the perfect minute to cause the most pain to options sellers.
Poor shorts - wrong place, wrong time.
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