June 3, 2007
Just in cased you missed the obvious:
The market maker exception is is subject to manipulation in two ways.
First, if i buy a put and sell a call (short the stock through options), then the market maker can short the stock to hedge without worrying about SHO. Effectively, I have evaded SHO through a loophole.
Secondly, allowing the market maker to keep a position open after the options position is closed in subject to manipulation. Say as a market maker i need to hedge by shorting and even after the options position is closed, i can keep the short open. In many firms I can transfer the risk to another part of the firm or another traders book who wants to be short. The firm can still claim the exception. The portfolio that is short has successfully evaded SHO.
As i pointed out above, I can effectively short a stock by exploiting this loophole and over time open a huge short position. No wonder so many stocks remain on the SHO list.
Stocks are not futures with infinite supply. Supply is supposed to be limited to what the company issued.
Allowing a few clever folks to exploit loopholes to the detriment of the rest of the market lowers liquidity- it doesn't increase it.
Force shorts to pre-borrow (not just locate it) - to ensure everyone is on the same level playing field.