UPDATE: Options Sector Renews Push For Short-Sales Exemption
April 08 2009 - 4:20PM
Dow Jones News
U.S. options exchanges will renew their pursuit of an exemption
from new short-selling rules proposed by regulators because the
exchanges fear such rules will disrupt trading.
The Securities and Exchange Commission proposals outlined
Wednesday lack exemptions for market makers in options or cash
equities.
Market makers are traders who provide liquidity by standing
ready to buy or sell contracts and securities. They need to short
stocks in order to hedge risk in taking the opposite side of
trades.
Options industry officials said they will review the SEC
proposals, but privately remain concerned that problems that
emerged during a temporary short-selling ban last year will
resurface.
Industry representatives plan to use the 60-day comment period
to remind the SEC of the need for a market-maker exemption. They
will also have the opportunity to air their views on May 5, when
the SEC holds a roundtable discussion on short-selling rules.
"This is the start of a process, and we will be part of that
process," said Jim Binder, spokesman for the Options Industry
Council.
Bill Brodsky, chief executive of the Chicago Board Options
Exchange, stressed the "vital role" that options market-makers play
in the smooth operation of markets.
"In our experience, impediments to the options market-maker's
ability to engage in legitimate short selling lead to unintended
consequences that adversely impact the market, such as reductions
in price discovery, market liquidity and market efficiency,"
Brodsky said in a statement.
A spokeswoman for the International Securities Exchange, the
options platform owned by Deutsche Boerse's (DB1.XE) derivatives
unit Eurex, said that ISE would review the proposals carefully and
ensure that its markets makers are able to continue doing
business.
Options market operators scrambled to gain an exemption last
fall when the SEC announced it would temporarily ban short-selling
in 799 stocks.
Some market makers warned that without an exemption, they would
have discontinued trading options on companies covered by the ban,
leaving options investors in the lurch.
The SEC proposals include two proposed market-wide short sale
restrictions and three circuit-breaker models.
Two of the circuit breaker models would trigger those rules,
while the third would trigger a trading ban for the rest of the day
on that particular stock.
The CBOE's Brodsky, who recently took over as chairman of the
World Federation of Exchanges, has made the understanding of short
selling a focus of WFE's outreach efforts with regulators,
particularly the SEC.
In a letter to SEC Chairwoman Mary Schapiro last month, NYSE
Euronext (NYX) and Nasdaq OMX Group Inc. (NDAQ), both of which run
options platforms, urged the SEC to adopt a modified version of the
uptick rule, and raised the market maker issue.
"The exchanges have views regarding the benefits of bona fide
market making in both equities and options markets, and on the need
for clear and precise guidance on what constitutes bona fide market
making and for an exemption for market makers," exchange
representatives wrote in the letter, adding that they planned
further comment.
-By Jacob Bunge, Dow Jones Newswires; 312-750-4117;
jacob.bunge@dowjones.com
(Sarah N. Lynch contributed to this story.)