Abstract
The Securities and Exchange Commission’s 2008 emergency order introduced a shorting ban of some 800 financials traded in the US. This paper provides an empirical analysis of the options market around the ban period. Using transaction level data from OPRA (The Options Price Reporting Authority), we study the options volume, spreads, pricing measures and option trade volume informativeness during the ban. We also consider the put–call parity relationship. While mostly statistically significant, economic magnitudes of our results suggest that the impact of the ban on the equity options market was likely not as dramatic as initially thought.
Highlights
The Securities and Exchange Commission’s (SEC) September 2008 emergency order introduced a near complete shorting ban of some 800 financials traded in the US
Using transaction level data from OPRA (The Options Price Reporting Authority), we study the options prices and market liquidity during the ban
In predictive intraday regressions of future stock returns on lagged signed option trading volume, we find that option volume becomes informative during the ban for the banned stocks
Summary
The Securities and Exchange Commission’s (SEC) September 2008 emergency order introduced a near complete shorting ban of some 800 financials traded in the US. While there has been some recent work considering the implications of the ban for the stock market directly (see, for example, Boehmer et al (2013)), the effects of the shorting ban on the equity options have been much less explored in the literature. Since we have data for the entire universe of optionable stocks across the exchanges, we are able to compare the options of the banned stocks and non-banned stocks to identify the effects. During the ban period, banned stock effective and quoted option spreads increase as well as the Black and Scholes (1973) and Merton (1973) volatilities and prices relative to non banned stocks. The economic magnitude and statistical insignificance of some of our findings suggest that the impact on the equity options market is likely less pronounced than initially thought
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