Dow Jones Newswire | U.S. traders warned that business could be
disrupted by new restrictions on short-selling stocks that lack an
exemption for market makers in options or cash equities.

Market participants said the absence of an exemption would limit their
ability to hedge risk when taking the other side of investors’ trades.

“We’re disappointed because of the potential impact on the options
markets,” said William Brodsky, chief executive of the Chicago Board
Options Exchange, the largest U.S. options venue by volume.

“Nonetheless, we are heartened by Commissioner [Luis] Aguilar’s
remarks that the staff is expected to study the impact of the rule on
the options markets and make adjustments to the rule, if warranted,”
Brodsky said. “Hopefully, if there are harmful impacts, the SEC will
also take quick action to provide an exemption.”

“It’s a huge issue,” said Kevin Fischer, head of the block execution desk for Interactive Brokers Group Inc.

Fischer warned the moves approved by U.S. regulators Wednesday could make it harder for investors to sell call options, which convey the right to buy a company’s stock, or buy puts, which convey the right to sell stock.

The U.S. Securities and Exchange Commission voted in favor of a new rule that will limit short sales on individual stocks when they decline 10 percent or more in a single trading session.

Short-selling, in which investors borrow a stock and sell it with the intention of buying it back at a lower price, came under scrutiny following the stock market crash that accompanied the financial crisis in 2008.

The practice has been criticized for giving investors cause to drive down stock prices, but it is key to the function of market makers at options exchanges.

The SEC said exemptions could be added at a later date.

The rule approved Wednesday allows short sales in falling stocks only if the price of the security is above the national best bid, making it less restrictive than an outright ban on shorting, which the SEC instituted in hundreds of stocks at the height of 2008’s financial chaos.

At the time of the ban, options exchanges convinced regulators to allow options market makers to continue shorting, rather than face a potential shutdown in U.S. options markets.

Market participants on Wednesday saw the lack of an exemption slowing U.S. options trade, and potentially making price spreads wider for investors.

Susan Milligan, senior vice president of government relations for the Options Clearing Corp., said it’s difficult to gauge how problematic the new rule will be.

“We would certainly have much rather seen a market maker exemption in there–no question about that–but there are too many variables for me to figure out the exact answer,” she said.

Stock market operators generally welcomed the rule, which resembled a proposal made last March by Nasdaq OMX Group Inc., NYSE Euronext, BATS Exchange and the National Stock Exchange.

A spokesperson for Nasdaq OMX said the SEC action “will be a welcome development among our issuers who have been seeking further regulation around short sale activity.”

However, William O’Brien, chief executive of electronic stock platform Direct Edge, raised doubts over the effectiveness of curbing short sales.

“We're not convinced this is going to improve market structure in the U.S.,” he said.