Oct. 08, 2022
October 8, 2022
As SEC has correctly identified with Rule S7-18-21, an obvious imbalance exists in the market between longs and shorts.
Where retail longs are accurately reported even before they are officially placed example Payment For Order Flow (PFOF) counter party shorts can operate in the dark without ever accurately reporting their trades example Obfuscated Short Interest, Failures to Deliver, Failures to Locate, Out-The-Money Puts, Swaps, un-tracked lending chains, illegally misreported as Longs.
Dangerous Stuff.
The myriad of obfuscation instruments in combination with lax reporting requirements erodes true price discovery and obfuscates the risk profile of long term investments made by the public. Rule S7-18-21 re-establishes some fairness in the market and allows investors to recognize the risk of remaining in a trade when short interest is rapidly piled on by large investment firms.
The SEC, in proposed rule 13f-2, explicitly noted its awareness of the myriad ways in which short selling can be used to abuse individual investors and working families. In proposed rule 13f-2, the Commission said it is ...mindful of concerns that certain short selling activity can be carried out pursuant to potentially abusive or manipulative schemes. For instance, market manipulators may seek to spread false information about an issuer whose stock they sold short in order to profit from a resulting decline in the stocks price. The Commission has previously noted various other forms of manipulation that can be advanced by short sellers to illegally manipulate stock prices, such as bear raids.\"
Thus, importantly, if the general public were informed of Rule S7-18-21, the equity it creates, and, the general public were informed they had the right to comment, the general public would largely support:
Transaction-by-transaction reporting which eliminates the ability to \"hide within the aggregate\" transparency means transparency and aggregates are not transparent. Secret short selling could dissuade actual investment as funds attempt to glean profit off the backs of capital investors. The fleecing must be mitigated if we are to claim that America's markets are among the best in the world. The American investing public cannot know it is being fleeced if the fleecers can hide in the aggregate. SEC must be equipped to (a) monitor short interest on a transaction-by-transaction basis to affirm SI is not exceeding the legally mandated thresholds, (b) dissuade counter parties who abuse the shorting and reporting system, (c) levy steeper fines and revocations for chronic abusing firms. (Looking at the egregious activity of Investment Banks and Market Makers):
Merrill Lynch - 1,458 FINRA violations as of 2021
2007 fined only $12,500 for FTD violations.
2009 fined only $90,000,000 for Options misrepresentation.
2014 fined only $525,000 for short interest misrepresentation on 36,413 positions totaling 9,530,879,808 shares.
2014 fined only $6,500,000 for FTD violations.
2015 fined only $9,000,000 for FTD violations.
2015 fined only $115,000 for short interest misrepresentation on 7,065 positions totaling 3,561,396,771 shares.
2020 fined only $75,000 for 13,198 instances of Options misrepresentation vs. short positions held.
Barclays Capital Services - 101 FINRA violations as of 2021
2009 fined only $50,000 for short interest misrepresentation.
2015 fined only $115,000,000 for short interest misrepresentation on 42 settlement days in 835 positions totaling 87,562,328 shares.
BNP Paribas - 88 FINRA violations as of 2021
2008-2012 fined for short interest misrepresentation on 1,934 positions totaling 330,000,866 shares.
2013 fined only $130,000 for short interest misrepresentation.
CIBC World Markets - 158 FINRA violations as of 2021
2005 fined only $60,000 for short interest misrepresentation.
2013 fined only $130,000 for short interest misrepresentation.
Deutsche Bank - 292 FINRA violations as of 2021
2005 fined only $15,000 for short interest misrepresentation.
2007 fined only $30,000 for short interest misrepresentation.
2007 fined only $45,000 for short interest misrepresentation.
2015 fined only $1,400,000 for short interest misrepresentation.
Edward Jones - 220 FINRA violations as of 2021
2007 fined only $55,000 for short interest misrepresentation.
2012 fined only $55,000 for short interest misrepresentation.
HSBC Securities - 74 FINRA violations as of 2021
2007 fined only $7,000 for short interest misrepresentation.
2007 fined only $27,500 for short interest misrepresentation.
2013 fined only $65,000 for FTD violations.
J.P. Morgan Chase - 490 FINRA violations as of 2021
2005-2006 fined only $26,500 for short interest misrepresentation.
2006-2013 fined only $375,000 for short interest misrepresentation.
2010-2014 fined only $2,300,000 for options misrepresentation.
Jefferies Company - 90 FINRA violations as of 2021
2007 fined only $525,000 for short interest misrepresentation.
2012 fined only $62,500 for short interest misrepresentation.
2014 fined only $235,000 for short interest misrepresentation.
UBS Securities - 288 FINRA violations as of 2021
2006-2009 fined only $225,000 for 437 occasions of misrepresentation.
2009 fined only $12,000,000 for FTD violations and configuring clients to bypass reg-sho locate requirements.
2014 fined only $7,500 for misrepresenting short interest in 1,580 positions totaling 262,260,266 shares.
Further, and given the above context of repeat-offenders, we the Public explicitly and implicitly support Rule S7-18-21's 15-minute reporting requirement, and are justified in this support when highlighting the historical cost and effort submitted to respond to, expose, and levy fines against the above loop holes, as opposed to the time and cost saved through adequate reporting and prevention measures.
While it is important to contrast historical cost and effort with new cost and effort, please note that systematized reporting also reduces exposure to influence, bribes, and corruption. An impartial reporting system deals in facts, it enables flagging and quicker response times, and can allow prevention of illegal trades.
In the spirit of a pragmatic argument, let the Public acknowledge that Large Firms are requesting the SEC's lenience in not implementing, debasing, or eschewing Rule S7-18-21. Large Firms have submitted their preference to remain clandestine, dishonest, not to admit or deny fault, to not report transactions, and to not be held liable to 15-minute reporting as Rule S7-18-21 would raise the costs of short-selling, and increase copy-cat trades (as it should be, short interest should not exceed legal thresholds, price discovery is serviced by first-come-first-serve, not total liquidity for all). Large Firms are concerned others might figure out what they are doing and trade against them (as a market should be, and Rule S7-18-21 protects Large Firms against themselves by limiting the over exposure of short interest. If firms cannot open egregious short positions, they cannot be exceedingly harmed by counter parties - Re:Archegos Credit Suisse). Funds are concerned if short selling is les
s profitable, greedy people would perform less research of companies (Correct, the informed public would perform more research into the illegal actions taken by counter parties, and while Private Short Analylsts' incentive to conduct due diligence on weak companies may be diminished, it is never entirely eliminated. Due diligence may still indicate the same opportunity in political climate or company's fundamentals, warranting the opening of a short position, Rule S7-18-21 only requires the Short Party to more appropriately manage the risk or failure in closing a position that has been adequately reported whereas today failed positions tend to be swept under the rug, inflicting harm upon the Lenders when risk is not appropriately reported or managed).
Let us acknowledge it is evident that the Large Firms partly or in whole, explicitly and implicitly, wish to protect the cash cow that is misrepresented short interest. As evidenced by their argument against Rule S7-18-21 and their repeat behavior, they will say and do anything to defend these short interest vehicles which contribute to their quadrillions of notional dollars. But what of the actual working families and everyday people who are victimized by financial predators people whose aggregate value are measured in billions and trillions of real dollars, not quadrillions of notional dollars? We can take a moment of humor to imagine the Large Firms dabbing their tears with dollar bills at the thought of having to submit adequate reports which actually protect them against themselves, while the SEC's new strategic plan puts \"working families\" front and center in this David and Goliath Story.
Note also, the victimized companies who need a greater ability to defend themselves against predators. Rule S7-81-21 can address \"short selling in the dark\", which harms true competition, anti-monopoly, price discovery and ability to raise capital. The idea that a small number of short-selling funds \"know best\" or can be endorsed by a Mega Corporations to hammer unsuspecting companies in the dark is shameful. We live in an age of Weaponized Finance, where companies like Amazon can and do hamstring the share value of its competitors through back door handshakes with private Hedge Funds. Secret short selling not only hurts individual investors in the name of greater profits for Large Firms, but it is a disruption toward Antitrust Laws. It may be a fine thing that America's Mega Corporations have rose to the top, but they now encroach more brazenly upon our Judicial and Legislative Process, partly due to their ability to covertly and intentionally eliminate share price of the compet
ition through allegiance with Large Financial Firms.
Remember, a short seller is not an investor, but the opposite, and while piling short interest does play a role in culling of the weak and survival of the fittest, SEC is correct to identify with Rule S7-21-18 that Shorting has gotten out of hand, and to chill the unstoppable tide of misrepresentation, adequate reporting is the first best step in taking an honest and equitable look at the state of our markets.
The only growing pains are those which are felt most when exposing the uncomfortable truth about the state of our current markets.