Subject: WebForm Comments from Anonymous
From: Anonymous
Affiliation:

Oct. 30, 2022

 I believe that the SEC and the role of our government is to increase transparency for the American people. The American people deserve to know the methods in which the financial world creates financial instruments, which can be used against their interest. I believe the rules that are suggested by this will help increase visibility and allow the American people to create better financial decisions for their family. The SECs focus on Main Street investors SUPPOSEDLY reflects the fact that American households own $38 trillion worth of equities  more than 59 percent of the U.S. equity market  either directly or indirectly through mutual funds, retirement accounts and other investments. I would like to see the SEC take concrete action to reflect the above statement -- and enact these rules to better serve our financial markets.


Before making recommendations regarding the Proposal, it is important to put some context
around the shortcomings of the current system and the Commissions goals with this proposal in
order to evaluate whether the proposal will be successful.
The Commission has identified the following shortcomings with current data: (1) fails to
distinguish economic short exposure from hedged positions or intraday trading, (2) fails to
distinguish the type of trader short selling or identify individual short positions, even for
regulatory use, and (3) fails to capture the various ways that short positions can change and the
various ways to acquire short exposure.3
In addition, The Commission explained that short
selling volume and transactions data cannot easily explain changes in short interest, exposing a
gap between these two types of existing data.

Furthermore, these data sets are subject to
differences in reporting lag, and can misrepresent the amount of short selling due to
mismarking.
These are significant and material shortcomings in the transparency of US capital markets, but
the Commission neglects to acknowledge the impact of these shortcomings. The lack of
transparency into short positions has led to deep mistrust in markets for retail investors, and
especially for newer retail investors. The Commission risks alienating these investors and
driving them away from US capital markets if they do not act to provide transparency and
certainty for them.
We Need Increased Transparency
Despite the pushback from industry firms who face increased compliance costs, we fully support
the Commission in this rulemaking, and urge the Commission to go further with these
disclosures. Our movement is born from frustration over the many complex and conflicted
aspects of market structure, with a lack of transparency and visibility into the inner workings
around short selling being a primary driver of our retail investor supporters. The lack of
transparency around short positions, the inability to adequately quantify short interest, and the
ability for firms to skirt regulation through derivative positions such as options and
security-based swaps are making a mockery of our free and open markets. The inadequate
ability to properly measure and understand economic short exposure leads to supply/demand
imbalances in markets and affects trading prices.
The protests of the industry in terms of the effort required to comply with the Proposal ring
hollow given the Commissions experience with interim temporary Rule 10a-3T - firms had no
problem complying and the data provided was useful to the Commission. Indeed, the Proposal
is easier to comply with, given the monthly rather than weekly reporting of interim temporary
Rule 10a-3T.
However, the Proposal does not go far enough. WTI urges the Commission to provide the same
level of disclosures and transparency for short positions as is currently done with long positions
via 13F filings. None of the arguments for aggregation or lagged reporting are consistent with
the reporting of long positions via 13Fs. Our markets already have a position disclosure
standard, and that standard should simply be updated with short positions to allow retail and
institutional investors to do the same kind of analysis regarding short positions as they currently
do with long positions.
We often lament the fact that regulators in other jurisdictions have done more, moved further,
and advanced the cause of transparency far more significantly than we have in the US. As other
commentators have noted, the EU adopted a short sale reporting regime that essentially
requires immediate public disclosure of large short positions, by individual issuers. Despite this
onerous disclosure regime that goes much further than the Proposal, we agree that a study of
the impact of the EUs regulation finds no evidence that the disclosure requirements have
resulted in increased coordination or have resulted in short sellers being targeted for short
squeezes.

 The concerns from the industry and from the short selling community are simply not
valid.
Harmonizing the Proposal with European standards would provide significant benefits, both
from a transparency perspective and from the short-selling investment managers perspective -
it is far easier to comply with the same rule across multiple jurisdictions than to manage varying
standards and rules from country to country.
It is also important to note, from the perspective of how to set an appropriate threshold for
disclosure that, as the Commission acknowledges, the European threshold of 0.5% is being
gamed, and therefore setting a threshold substantially higher than that will lead to even further
gaming of the threshold and disclosure avoidance. There should be little doubt that firms will
attempt to game any threshold that is set, as has happened with 13F long disclosures for many
years. Given the European experience with a very low threshold, we would argue that it is
important to set the threshold as low as possible to mitigate any effects and impacts from firms
attempting to game the threshold.
Despite the constant concerns expressed in comment letters about reverse engineering trading
strategies and the concern voiced in the proposal that there would be a risk of retaliation
towards short individual sellers as well as the ability for market participants to engage in
copy-cat strategies,\"
the same can be said of current 13F disclosures. Indeed there is an entire
industry that follows 13F and other similar disclosures (e.g., politician trades) and allows for
copy-cat strategies.
The value of transparency and the need for investors, both retail and institutional, to understand
the holdings of investment managers, as well as to form an accurate picture of short interest
and short trading dynamics should far outweigh these concerns. The Commission has agreed
with this view in crafting 13F policies, the EU has agreed with this view with their disclosure
regime, and the Proposal should be expanded to include robust public disclosure at the
individual manager level of this information.
Finally, we would further urge the Commission to set a goal to harmonize reporting timelines for
all relevant disclosures, from 13F long and short disclosures to reporting timelines for FINRA
and the SROs to ensure that data is released consistently, to avoid misunderstandings and
misconceptions.

While retail investors may not always have access to the
type of funds that accumulate significant short positions, they may still be in the position of doing
business with such firms, and they deserve to know when such firms are betting against core
portfolio positions that they may be holding and may be very passionate about.
The feedback from the industry has several consistent themes, but primarily it is focused on
disguising short selling activity and reducing transparency. This is antithetical to the
Commissions objectives with the Proposal. Investors, both retail and institutional, cannot
properly exercise their right to choose investments, counterparties and other relationships
without visibility into the firms that they are investing in or doing business with. An appropriate
level of transparency is absolutely required to empower investors to act in their own best
interests in an informed manner.
All Short Exposure Must Be Included
The Proposal as currently crafted has a huge hole that must be remedied, one that the
Commission is well aware of - an investor wishing to profit from the decline of a securitys value
can also trade in various derivative contracts, including options and security-based swaps.
8 The
failure to include derivative exposure in this rule will inevitably result in firms exploiting the
loophole and will drive more and more firms into the less regulated and less transparent space
of derivatives. As the Commission acknowledges in the proposal, trading in derivatives
frequently leads to related trading in the stock market as derivatives counterparties seek to
hedge their risk.
9 Derivatives have an impact on the market, and can have a detrimental effect
on the price of stocks, as Archegos demonstrated so clearly. While the positions held by
Archegos were not disclosed anywhere publicly because they had exploited a loophole in 13F
disclosures, the impact on the market was material and overwhelming. Indeed, had these
derivative positions been adequately disclosed, it is likely that institutional broker-dealers would
have had enough information to mitigate the impact of Archegos trading, would have been able
to recognize the significant exposure that resulted from the leverage they extended via total
return swaps, and would have prevented the crisis from developing in the first place.
In much the same way, it is critical for institutional broker-dealers and for retail and institutional
investors to understand the extent to which individual firms have high levels of short exposure to
individual stocks or ETFs, regardless of whether that exposure is via equity, through the use of
derivatives or through other novel mechanisms that the Commission has not considered.
Markets are changing and evolving, and as regulators impose new disclosure requirements on
firms, those firms will figure out ways to game or avoid those disclosures. Thats what Archegos
did with swaps, and thats what other firms might do with other novel ways of gaining short
exposure. One example of this could be through security tokens on crypto exchanges. Another
could be through the use of fungible or nearly fungible holdings in foreign affiliates - both equity
and derivatives.

If one of the primary goals that the Commission is seeking to achieve with the Proposal is to
give retail and institutional investors, along with regulators, better visibility into economic short
exposure, it is imperative that all short exposure is included.
We would also encourage the Commission to include ETF creation and redemption activities.
ETFs constitute 10% of U.S. equity market capitalization but over 20% of short interest and
78% of failures-to-deliver.
10 Authorized participants are incentivized to operationally short
ETFs, and often fail to deliver these shares. This is a potential source of stress on financial
markets, and the potential source of stress on the financial system appears to have shifted
from common stocks during the pre-crisis period to ETFs during the post-crisis period.

As
such, transparency into the ETF creation and redemption process is more important now than
ever before. Whether that transparency starts strictly with regulatory transparency versus public
disclosure is one that the Commission will have to decide - we would urge full public disclosure
of ETF activities in order for the public to more accurately and adequately evaluate the risks
involved in trading ETFs, and to better understand the short interest numbers in ETFs that can
vary wildly.


If the Commission insists on continuing with the aggregated disclosures, we would offer one
suggestion for an important change. The current proposal for categorizing a position as not
hedged, partially hedged or fully hedged could lead to serious problems and misrepresentations
of actual economic short exposure, which is the first shortcoming identified by the Commission.
Aggregated information could actually end up being very misleading, by painting an inaccurate
picture of the size of short positions despite the hedging distribution disclosure. Partial
hedging could be manipulated or abused to mask true short positions (e.g., by hedging an
immaterial portion of the position to flag it as partially hedged), and overall gross position
disclosures could overstate short positions when net positions are not accounted for. A better
solution would be to have the actual amount of position hedged, which could range from 0% to
100%+ if the managers long position is larger than the managers short position. This is similar
to one of the alternatives proposed by the Commission, to report the delta value of hedged
positions. This would be a critically important addition to the Proposal and make it far more
informative if aggregation is the direction the Commission goes.
Bona Fide Market Making Reporting
We believe it is important that the Proposals provision that would require CAT reporting firms
that are reporting short sales to indicate whether such reporting firm is asserting use of the bona
fide market making exception under Regulation SHO

While we are encouraged by this, as it signals that surveillance teams and regulators are finally
trying to better understand the use of this exception, we believe it to be an antiquated exception
that is no longer applicable in modern markets, and which should be eliminated. The bona fide
market making exemption is being abused, as illustrated by recent enforcement actions
, and
provides an unreasonable competitive advantage for firms who do not have affirmative
obligations to make continuous markets on lit exchanges. As the Commission acknowledges in
the proposal, firms that do not need to obtain a locate prior to effecting a short sale, on the
basis of the bona fide market making exception, have a competitive advantage over firms that
are required to obtain a locate because these firms can trade more quickly and more easily
adjust to or take advantage of changing market conditions.
15
It is also possible that market makers are using the bona fide market making exception to
include transactions and arrangements where other broker-dealers or customers are using the
market makers exception to avoid compliance with Regulation SHO. It is important that the
SEC and FINRA have the surveillance tools and data necessary to police markets, and
including this data in CAT should be an easy decision.
While it is outside the scope of the Proposal, we believe that market structure reform should
focus on leveling the playing field, and fostering more robust and verdant competition in
markets. Repealing regulation that affirmatively advantages certain firms over other firms is an
important step in that direction.