Tagged: Reg SHO

Caveat Short Emptor

What’s 218 pages and heavily footnoted? 

No, not an Act of Congress. Federal laws are ten times longer or treated as unserious.

It’s the new SEC proposed short-sale rule.

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I admit, I was excited. As the sort who read Tolstoy’s War and Peace in high school and in college relished French symbolism and theological exegesis – finding meaning in dense and inscrutable texts – what could be more compelling than an SEC rule proposal?

Well. Hm.

Under the Gensler regime, the SEC has engaged in hyperventilating levels of rulemaking while suppressing discourse. Between Feb 9-Mar 21, 2022, the SEC issued six MAJOR rule proposals.

How the hell can we read them – even me – let alone respond substantively?

Politburos do that.

We want fair markets. I support short-sale disclosure. 

But not at the expense of discussion or at the cost of permitting the SEC to regulate matters over which it has no authority.

Contrary to popular belief at the SEC, it’s not omniscient in our financial pursuits. It exists to reduce the risk of fraud in public equity and fixed-income markets.

It could be argued the Constitution enumerates no such federal authority at all. Whatever the case, if a power enlarges like a prostate, it’s probably cancerous.

Cough, cough.

Back to the short-sale rule. Dodd-Frank legislation after the Financial Crisis – crises always diminish liberty (and seem to thus compound) – directed the SEC to implement short-sale reporting, so investors and public companies would know who’s doing it.

The Fact Sheet for Rule 13f(2), as it’s called, says the principal purpose is to “aid the Commission in reconstructing significant market events and identifying potentially abusive trading practices, including short squeezes.”

Are short squeezes abusive?  I thought the purpose of the Exchange Act that created the SEC was to promote transparent and equitable markets.  Did you know that the compulsory disclosures public companies are making today under forms 10Q and 10K date to 1933 and 1934? You think the market functions anything like it did then?

If you do, you haven’t read Regulation National Market System. I have. I read the Federalist Papers for fun, to hear the mellifluous wonder of the English language.

For those struggling with math, it was 88 years ago. Not the Federalist Papers, the Exchange Act of 1934. Automobiles and electricity weren’t ubiquitous on the fruited plain yet then, let alone cell phones, algorithms, and electronic markets.

Now the SEC is regulating to give itself information, not to give the public information.

Again, I’m for transparency. The proposal says: 

Form SHO would require that institutional money managers file on the Commission’s EDGAR system, on a monthly basis, certain short sale related data, some of which would be aggregated and made public. Certain data, including the identities of such managers and individual short positions, would remain confidential.

Wait, what?

The SEC would get a bunch of data, and the rest of us would see anonymous aggregated meaningless stuff. 

Got that?

Yes, the rule proposes that investment managers report short positions greater than $10 million, or average shorting of 2.5% of outstanding shares monthly.  BUT, not by fund.

It’s anonymous data.

So really, PUBLIC COMPANIES get penalized. Everybody would know which stocks are getting the hell pummeled out of them – but not by who.

What does that promote? Mob behavior.

You have to read what the SEC says. For that matter, you should read what the exchanges say when they file to implement regulations.  It may not be what you think.

And while the SEC will collect more data, the biggest source of shorting in the stock market, the market-making exemption from Reg SHO Rule 203(b)(2), is undaunted.

Yes, brokers will have to report “buy to cover” orders or class them as exempt under the provision above.  What would you do as a broker? Report them or class them exempt?

Let me explain. Brokers will continue to be permitted to short stock without locating it, because the SEC thinks the principal purpose of the stock market is to form PRICES, not CAPITAL.

But they will promote an artifice called “short-sale reporting.”

I’m offended by that. The SEC should be mandating 13F reporting monthly for long and short positions. That the Commission instead wants short positions without names each month and long positions by name 45 days after the end of the quarter is sententious.

Quast, what does that mean? Pompous moralizing.

We don’t have legislative authority to mandate monthly long-reporting, the SEC will say. Hypocrites. The SEC just issued climate-disclosure rules with no legislative authority.

The SEC has forgotten its purpose: Free, fair and transparent markets.

Instead, it’s after power, political agendas. Not truth. By the way, see comments here (and I LOVE Patrick Hammond’s). Let’s add to them.

We should reject that impulse, even if it means waiting longer for a rethinking of 88-year-old disclosure standards.

“We determined that it was appropriate to re-examine the appropriateness of short sale price test restrictions.”

We copied that sentence from the SEC’s 334-page charter instituting Rule 201 amendments for short sales. While it’s amusing that the authors modified the word appropriate with the word appropriateness, what’s important is that the rule took effect yesterday, Feb 28. What is it and how might it impact investor relations?

It’s hard to summarize a document consuming 60% of a ream of paper in one sentence. But Rule 201 implements an uptick rule – which regulators removed as part of Reg NMS in 2007 – when securities drop 10% from the preceding day’s closing price. If that happens, an uptick rule will be enforced in which long sellers matching at the best bid or offer will be able to sell ahead of short-sellers, and shorts will only be able to sell if the price ticks up above the last bid.

The idea is that if long sellers get called up to the front of the line, it’ll promote investor confidence by reducing the severity of short-driven price swings. And it’ll improve market-efficiency by letting those with long positions off the boat, thus discouraging short sellers from trying to sink the boat. (more…)