May 30, 2011
I believe that short selling can play a legitimate part of public securities markets however there needs to be far more public disclosure of short transactions and positionss. From a retail investor perspective we receive a very limited amount of information that is stale (delayed many days) and limited to twice a month. The sophisticated brokerage firms and other institutional players have access to much more information on a timely basis because they facilitate these transactions and have the relationships to know about larger short positions.
In a world where computers can trade in an out of positions in small fractions of a second it clear that the costs associated with more disclosure are very reasonable. The biggest resistance to change is that the current regulatory framework allows insiders to profit from an antisymmetry of information.
I believe the following changes should be made:
1. Short sale equity transactions should be identified in real time so anyone watching the actual sales transactions for a particular security can see if the sales being made are longs who may be sell vs shorts who hoping the price will fall.
2. Funds that have a requirement to disclose long positions should also have a requirement to disclose short position.
3. Fund companies that have a large short position should be required to file the same disclosures that long investors are for positions greater than x% of the outstanding shares. Any additional new transactions should also be reported in a similar fashion. For long investments I believe that 5% is the disclosure level however I think the percentage for shorting should be lower because many hedge funds tend to "team up" when building short positions. If the threshold were set too high many funds would avoid the reporting requirements by building a short position of 4.9%.
I have no problem with people taking a short position however I believe there is plenty of evidence that short sellers will actively work to undermine the business interests of the companies they are short. Legitimate questions are important to be raised however when funds hide their positions others may not question their motives properly.
Thank you for your consideration of my ideas.