Anybody have any thoughts what a short selling ban would do to the equity options markets? I know the initial reports of a total ban were exaggerated or premature, but I am curious how it would play out if it really happened. I have a few guesses, all leading to lower liquidity:
1) MM's long delta can't short so try to manage risk by adjusting the options in their books, maybe increasing bids/back off asks on puts and vice versa on calls until flat again. It takes longer for option order flow to balance the position so liquidity goes down.
2) MM's long delta hedge by selling index futures or SSF. There is higher basis risk, so they need to make more from their option market making, and widen spreads. Index futures are probably liquid enough to absorb the hedging, what would it do to SSF?
3) Demand for synthetic shorts goes up so there are more sellers of calls and buyers of puts. These are the same positions that long delta MMs would like to put on, so they basically compete with MMs for these trades and strain liquidity more.
Does this make sense?
1) MM's long delta can't short so try to manage risk by adjusting the options in their books, maybe increasing bids/back off asks on puts and vice versa on calls until flat again. It takes longer for option order flow to balance the position so liquidity goes down.
2) MM's long delta hedge by selling index futures or SSF. There is higher basis risk, so they need to make more from their option market making, and widen spreads. Index futures are probably liquid enough to absorb the hedging, what would it do to SSF?
3) Demand for synthetic shorts goes up so there are more sellers of calls and buyers of puts. These are the same positions that long delta MMs would like to put on, so they basically compete with MMs for these trades and strain liquidity more.
Does this make sense?