June 30, 2025 – The Securities Industry and Financial Markets Association (SIFMA) has formally requested a one-year extension from the U.S. Securities and Exchange Commission (SEC) to delay the compliance date for reporting certain short sale transactions to the Consolidated Audit Trail (CAT).
Specifically, SIFMA seeks to postpone the requirement for broker-dealers to flag short sale orders executed under the Bona Fide Market Making (BFMM) exception to the locate requirement under Rule 203(b)(2)(iii) of Regulation SHO, originally set for July 1, 2025.
This request has sparked concerns among investor advocates about potential risks to retail investors, including heightened vulnerabilities to market manipulation.
The CAT is a comprehensive database designed to track all equity and listed options orders and trades in the U.S. markets.
Mandated by the SEC, it aims to enhance regulatory oversight by providing a detailed audit trail of trading activities.
When fully operational, CAT will be the largest repository of trading data, including personally identifiable information (PII) of retail and institutional investors.
The system is intended to improve the SEC’s ability to detect market manipulation, insider trading, and other illicit activities, thereby protecting market integrity and investor interests.
The BFMM flag requirement is a critical component, as it identifies short sale orders executed by market makers who are exempt from the “locate” requirement—meaning they do not need to confirm the availability of shares to borrow before executing a short sale.
This exemption is intended to support market liquidity but has been flagged as a potential loophole for abusive short selling practices if not properly monitored.
SIFMA’s Request for DelayIn its June 5, 2025, letter to the SEC, SIFMA argued that the complexity of determining whether trading activity qualifies as bona fide market making necessitates additional time for compliance.
The trade association highlighted the “facts and circumstances” nature of the BFMM exception, noting that broker-dealers engage in varied market-making activities, including over-the-counter (OTC) trading.
SIFMA contends that a one-year extension to July 2026 would align with the SEC’s prior decision to extend compliance for Rule 13f-2 and allow firms to better prepare for accurate reporting.
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Dangers to Retail Investors
The proposed delay in CAT reporting, particularly for the BFMM flag, raises significant concerns for retail investors.
Here are the key risks:
- Increased Risk of Market Manipulation: Without timely CAT reporting, regulators may lack the granular data needed to detect manipulative practices, such as naked short selling or spoofing, where market makers could exploit the BFMM exception. A 2021 SEC staff report on the January 2021 market volatility (e.g., the GameStop short squeeze) demonstrated CAT’s utility in analyzing trading activity and identifying potential misconduct. Delaying enhanced reporting could hinder such oversight, leaving retail investors exposed to price distortions.
- Reduced Transparency: The BFMM flag is designed to provide clarity on short sale activities that rely on the locate exemption. Postponing this requirement could obscure the extent to which market makers are engaging in short selling, potentially masking activities that affect stock prices. Retail investors, who often lack access to sophisticated market data, rely on regulatory tools like CAT to ensure fair markets. A delay could erode trust in market fairness.
- Liquidity vs. Accountability Trade-Off: While SIFMA argues that the BFMM exception supports market liquidity, unmonitored use of this exemption could enable predatory trading practices. For instance, excessive short selling under the guise of market making could depress stock prices, harming retail investors holding long positions. A 2008 SEC amendment to Regulation SHO emphasized the need for clear guidance on the BFMM exception to prevent abuse, underscoring the importance of timely reporting.
- Data Security Concerns Amplified: The CAT database already raises privacy concerns due to its storage of investor PII. Delaying specific reporting requirements while the system remains operational could prolong exposure to data security risks without delivering the full regulatory benefits intended. SIFMA itself has raised concerns about CAT’s data security, advocating for stricter measures to protect investor information.
Market Manipulation Probabilities
Quantifying the exact probability of market manipulation due to delayed CAT reporting is challenging, as it depends on multiple factors, including market conditions and regulatory enforcement.
However, recent discussions on platforms like X highlight heightened public concern. Posts on June 27 and 29, 2025, referenced claims of “7 billion errors” in CAT data on a single day (June 17, 2025), suggesting potential vulnerabilities in the system’s ability to detect manipulation without full implementation.
These claims reflect a broader sentiment that delays could embolden bad actors exploiting regulatory gaps.
Historical data provides context: the 2021 GameStop event exposed how short selling, including by market makers, can lead to significant market disruptions.
The SEC’s use of CAT data in that case underscored its role in identifying unusual trading patterns.
A delay in BFMM flag reporting could reduce the SEC’s ability to monitor similar events, increasing the likelihood of undetected manipulation, particularly in volatile or heavily shorted stocks popular among retail investors.
SIFMA’s request aligns with its broader advocacy for balanced regulation, emphasizing the need for operational feasibility.
The association has consistently engaged with the SEC on CAT, raising concerns about costs, data security, and the feasibility of passing costs to investors.
However, investor advocates argue that further delays prioritize industry convenience over market integrity.
The SEC’s 2020 proposal to enhance CAT data security, which remains unresolved, adds to concerns that the system’s full potential is being undermined.
The SEC faces a delicate balance: granting SIFMA’s extension request could provide broker-dealers time to refine compliance processes, but it risks delaying critical transparency needed to protect retail investors.
As CAT becomes fully operational, any postponement of reporting requirements, particularly for the BFMM flag, could exacerbate vulnerabilities to market manipulation and erode investor confidence.
The SEC must weigh these risks against industry concerns, ensuring that retail investors are not left bearing the cost of regulatory delays.
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