The options market maker exception to SEC Regulation SHO

► Market makers enjoyed a narrow exception to short sale locate and close-out rules. ► Exception elimination affected optionable and non-optionable stocks differently. ► Optionable FTDs were lower and stock borrow prices higher after elimination. ► Higher stock borrow prices led to more FTDs when settlement failure was an option. ► Our findings are consistent with anecdotal evidence that the Exception was misused.