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August 11, 2008

Reg SHO Fails Reviewed

By Peter Chapman

Options market makers are to blame. New data released by the Securities and Exchange Commission indicates that many shares sold short but not delivered to buyers are shorted by options dealers. That could lead the SEC to eliminate or tighten up the exception to Regulation SHO granted to options market makers who fail to deliver securities when they short stock.

The SEC gathered and made public the statistics at the behest of options market makers such as Susquehanna Investment Group and Group One Trading.

The SEC looked at several sets of data. One set came from a large clearing organization and covered January and February 2008. During this time, on one day, the options market maker exception was claimed in 16 securities, representing fails to deliver covering 6.4 million shares.

The SEC also released an analysis done by its Office of Economic Analysis comparing fails to deliver before and after the elimination of the so-called "grandfather" provision for cash equities dealers. It found that extended fails to deliver in securities that were not optionable "declined significantly" after that elimination, while fails in optionable stocks "increased significantly." The regulator is gathering public comment on the issue through the 13th of this month.

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