Short Sale Disclosure: Striking the Right Balance
Oct. 13, 2023
As with securities lending, short sales, provided they are conducted in compliance with applicable rules, can play a valuable price discovery role in our capital markets. That said, they can sometimes contribute to, or even cause, precipitous price declines, facilitate market manipulation, and generate market uncertainty and volatility.
To minimize the gap between these benefits and downsides, the Commission’s action today strikes the appropriate balance between increased transparency for investors and regulators of short sale-related data, and concerns about real-time disclosure of trading strategies.
Currently, Regulation SHO is the primary rule governing short sales of equities. Although this rule imposes some recordkeeping obligations on broker-dealers, it does not require market participants to track whether short-sellers cover their short sales or report bona fide market-making information on a regular basis.
Today’s rule will shine a light on short sale activity by institutional investment managers. It fills gaps in the data these managers currently report about their monthly and daily short sale activities.
This data is essential for the Commission to assess and monitor risks related to large short positions, for reconstructing market events, and for deterring fraud, manipulation, and other potential market abuses.
By improving market visibility, today’s reforms will also make the price discovery function that shorts can play more robust and transparent. By making available additional information about variation in short positions, as well as sentiment in the market during a specific timeframe, the rule may increase price efficiency and help market participants in making more informed trading decisions.
Overall, the short sale disclosure rule will increase transparency, enhance market oversight, and reduce systemic risk from large, short-selling positions. The rule complements the action the Commission has taken today to address transparency in the securities lending market, especially the public disclosure of securities lending information.
Through both actions, we fulfill the mandate that Congress gave us under the Dodd-Frank Act and our mission to promote fair and transparent markets. The cumulative impact of these reforms is positive and benefits the public interest and the investing public we have a responsibility to serve.
I am pleased to support the short sale disclosure rule and join my fellow Commissioners in thanking Commission staff for their hard work on this difficult issue.