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I am seeking insights on high-frequency market making strategies in markets where short selling is prohibited. While browsing through research papers and quant.stackexchange.com, there's frequent mention of double-sided bid and ask quotes. However, in markets where short selling is not allowed, I guess this aspect becomes irrelevant. Are there any studies or resources addressing this specific challenge? Alternatively, how can existing high-frequency trading market making literature be adapted to accommodate the absence of short selling mechanisms?

Thanks in advance.

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good point and two answers

  1. if you are an official market maker, you get a waiver and you can short sell to quote at the ask;
  2. if not, you can borrow the stocks you want to make the market on.

There is evidence of point (2) in L and Sophie Laruelle. Market microstructure in practice. World Scientific, 2nd Edition 2018. The bid-ask spread is generally larger on stocks that are hard to borrow compared to other stocks (as usual "liquidity brings liquidity").

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