Hedge Funds Will Now Disclose Which Companies They Short

October 23, 2023

Hedge funds will now disclose which companies they sell short to the Securities and Exchange Commission (SEC), reports the WSJ.

“Traders will get a broader look at which public companies are being targeted by short sellers under rules the Securities and Exchange Commission adopted Friday as part of its response to the 2021 GameStop trading frenzy.

In a short sale, a trader bets against a stock by borrowing shares and then selling them in hopes the shares’ price will decline before the trader must return them to the lender.

In the case of GameStop, individual investors sought to create a “short squeeze” by forcing short sellers to buy stock to cover their positions, boosting share prices.”

SEC commissioners voted 3-2 on Friday to adopt two rules—one aimed at large short sellers, and the other at lenders of securities.

“These are two opaque areas of the market, short selling and securities lending,” Gensler said.

The SEC Chair says that the changes should promote greater transparency and efficiency in the market.

Republican SEC Commissioner Mark Uyeda said the changes could discourage short selling and, therefore, curb the market’s ability to appropriately price assets.

“The final rule places burdensome and costly reporting requirements on investment managers instead of adjusting, consolidating, and leveraging data already collected,” said Bryan Corbett, president of the Managed Funds Association, a group of hedge funds.

Ken Griffin’s Citadel Securities is now suing the SEC over its new market transparency rules meant to keep institutions under tighter surveillance.

The hedge fund was recently fined $7 million for marking short sales as long for five years.

“Compliance with the order marking requirements of Reg SHO is a key component of regulatory efforts to curtail abusive market practices, including ‘naked’ short selling,” says Mark Cave, Associate Director of the SEC’s Division of Enforcement.

Other SEC News Today

SEC Commissioner Jaime Lizarraga said on Friday that securities lending facilitates illegal trading.

The official SEC statement comes after regulators have been expected to adopt new market transparency rules that will shed light on short sellers and other market participants.

“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”, said Commissioner Lizarraga.

“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.“

Today, investing communities have raised concerns of market manipulation in stocks such as AMC Entertainment, Meta Materials, FingerMotion, Global Tech Industries, Mullen Automotive, and many more.

Stock manipulation from short sellers, primarily hedge funds, is a topic that main street has been urging our regulators to tackle head on.

Also Read: SEC’s Director of Enforcement Now Under Investigation for Corruption

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