There are new SEC rules coming into play that could very well lift suppression imposed on so called ‘meme stocks’.
The SEC just released a report outlining the variety of ways they intend on protecting retail investors from market manipulation.
Heavily shorted stocks such as AMC and GameStop will skyrocket if these SEC rules are enforced.
And I’m going to break down why in this article below.
Welcome to Franknez.com – the SEC is proposing new rules that call for short seller transparency. In their report, they acknowledge what retail investors have been saying and have now come up with a plan.
Let’s dive right into it!
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New SEC rules propose market transparency
The SEC is proposing a new rule designed to provide greater transparency through the publication of short sale related data.
Short sellers will be required to submit a report on a monthly basis specifying their short positions and short activity data under the 13f-2 rule.
This proposal is significant because it’s going to provide regulators with insight on every short seller trade.
With this proposal in play hedge funds will have no other option than to report overleveraged positions, or refrain from imposing predatorial strategies.
Because short sell activity will be monitored, hedge funds are stuck playing fair.
The SEC has acknowledged that short selling has been used to manipulate the market to drive share prices down.
They also confirm retail investors have been targets of “short and distort”.
Short and distort is a strategy used to drive a stock’s share price down using publicity campaigns and then capitalizing from the drop.
Regulators acknowledge market manipulation in report
The SEC said in their report, “while short selling can serve useful market purposes, it also may be used to drive down the price of a security, to accelerate a declining market in a security, or to manipulate stock prices.”
This statement alone is very significant for many reasons.
- The SEC doesn’t need to be convinced of market manipulation anymore, they’ve acknowledged it.
- They understand exactly what’s happening in the markets and how it’s affecting retail investors.
Now it’s just a matter of finding solutions to lift the suppression being imposed on heavily shorted stocks such as AMC and GameStop.
Disclosure of short sell positions and activity could very well be the start of it too.
If you were slacking off at work but now have your boss micromanaging you, you’d be more inclined to refrain from slacking off, correct?
It’s this type of micromanaging we need to see regulators impose on short sellers so that the demand from retail orders accurately reflect on the price of a security.
Rule 13f-2 enforces 10b-21
Rule 10b-21 addresses failure to delivers in securities that have been associated with naked short selling.
This rule is meant to prohibit abusive naked short selling.
However, there has been no way of identifying overleveraged positions or short sell activity to enforce no such acts are carried throughout the market.
That’s where rule 13f-2 comes into play.
13f-2 provides the commission for public disclosure:
- The name of the issuer
- CUSIP number (a unique identification number assigned to stocks and registered bonds in the United States and Canada.)
- and number of short sales of each security
When enforced, this SEC rule will allow regulators to identify everything there is to know about a hedge funds short selling activity.
Community, this is quite big.
Public disclosures will occur every month.
“Buy to cover” rule and CAT firms
Proposed Rule 205 would establish a new “buy to cover” order making requirements for certain purchase orders affected by a broker-dealer.
The Proposal to Amend CAT would require CAT reporting firms to report short sale data not currently required that would enhance regulators’ understanding of the lifecycle of a trade – from order origination and through order execution and allocation.
This means the SEC will now have eyes on where a short sell comes from and where it gets processed and moved to.
Here is where naked shares may be exposed, recorded, and become obligated to get closed.
This Proposal to Amend CAT holds every party during the trade of a short sell accountable.
How do these rules lift suppression on heavily shorted stock?
The SEC says these proposals could help to advance the policy goal of investor protection by deterring market manipulation.
This means that when enforced, hedge funds will now be forced to play by the rules since all data is being recorded through a variety of parties, making it complicated to report inaccuracies.
The SEC on illegal short selling and “Bear Raids”
The SEC’s report is filled with information retail investors have been raising awareness about for over a year now.
They briefly go over the spread of false information from which short sellers profit from the decline of a stock’s share price.
“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 stock’s price.”
This is something Elon Musk just recently spoke to CNBC about.
Hedge funds and corporate media have played a big role in “Bear Raids”.
Bear raids are an illegal practice to plummet a stock’s price through concerted short selling and the spread of false or negative information about the target.
This influences public sentiment and opinion.
We’ve seen this illegal practice too many times with AMC and GameStop.
Platforms owned by News Corp. attacked AMC and GameStop by publishing articles to derail retail investors from purchasing the stocks.
As millions of retail investors bought ‘meme stocks’, hedge funds shorting the stocks lost billions of dollars.
CEO and founder of hedge fund Citadel Ken Griffin coincidentally has a stake in News Corp.
The SEC warns short sellers of “Short Squeeze” risk
A short squeeze poses massive risk to not only hedge funds and market makers but also to small short sellers.
The SEC did not miss outlining the risk a short squeeze has on short sellers in their market transparency report.
AMC and GameStop’s current reported short interest is more than 20% each.
This is more than enough short interest to squeeze shorts from their positions.
And because hedge funds have been overleveraging their positions, this is no ordinary play anymore.
Hedge funds now have a ticking time-bomb that may cause systemic risk.
Will AMC and GameStop experience a managed short squeeze?
Leave your thoughts in the comment section below.