April 4, 2022
Hello, I will answer the questions that are listed throughout the proposal, but first I would like to address the very nature of short selling, so get ready for a small soap-box analysis.
Personally, I don't believe that short selling should be allowed by anyone at all. The reasons for its merit are listed in the introduction to this proposal as \"a means to profit from an expected downward price movement, to provide liquidity in response to unanticipated demand, or to hedge the risk of a long position in the same security or a related security. Short selling has also been shown to improve pricing efficiency by providing information to the market.\" I don't agree with any of this.
Well, I guess it's ok to profit from a downward price movement. But then when you really use your head and think about it, the short seller is either gambling on short term trade patterns of a security or betting on failure of a company (and the destruction of people's livelihoods), and neither of these reckless behaviors should be allowed in the securities market by those that regularly take part in short selling because short selling has very important impacts on everyone that has investments in the affected security/securities. All investments are a risk and gamble, but this gets reckless and has too much of a systemic risk to the securities market and to the overall economy to be allowed, simply to make a few bucks on a downward price movement. In many areas of the law, there must be a balance between the public good and private enterprise, and short selling does not maintain that balance at all.
Also, the notion that \"liquidity needs to be provided for unanticipated demand\" is ludicrous. What it does is prevent true price discovery. If every trade is reflected on the ticker price, people will base their buys and sells off of that, along with the recorded volume, and the overall business and financial health of the company. If there are no overlapping buy and sell limit or market orders, then there should be no liquidity, and none should be made. If there is high demand but no/low supply, then again there should be no liquidity and none should be made. If there is low demand but high/supply, then again there should be no liquidity and none should be made. If there is sufficient overlap of buy and sell limit or market orders, then there is liquidity and none needs to be made. I think the pattern is fairly obvious, but I will state it explicitly for the record: THE MARKETS MAKE THEMSELVES, THE NOTION THAT LIQUIDITY IS ALWAYS NEEDED IS IDIOTIC. This will lead to the truest price discovery possible, rather than some market maker like Citadel or Virtu short selling securities to \"make a market\" for it, which can easily distort the price of the stock.
As for hedging, buy puts like the rest of us retail investors. Or better yet, choose investments that you are confident in, and use the financial advice retail is given, only invest what you're willing to lose.
And finally, I see very little information that can be added to the market based on short selling. All it does is allow the stock to return to the correct price once the short positions are completely closed. But it should have already been at the correct price. The argument could be that it puts pressure on the company to perform even better to remain competitive and attractive to investors, but investors do that by simply buying and holding a stock they believe in, and selling stocks they don't believe are doing well. There is no need for added pressure to a company, the market already applies that pressure to perform, and short selling merely distorts the price.
Alrighty, on to the actual questions posed throughout the proposal:
Q1: Yeah, there is possibly a better way to report short sales. Force financial institution (broker-dealers, transfer agents, banks, Hedge Funds, etc.) to use software that records every account transaction and trade transaction and automatically sends a report at the end of the day of the gross transactions and positions of the firm to the SEC. This software will have to be vetted before use by the SEC, and if any audits show noncompliance or avoidance of this tracking, then the business must be fined, the amount fined would be the entire revenue made during the time of noncompliance. That will get institutions to fall in line real quick and make sure they are reporting the correct numbers of short sales and all other transactions. I'm sure with the increased retail interest in the regulation of securities it would not be hard to find people/companies to make this sort of software.
Q2: I believe it is possible to record all transactions and summarize them using technology, so there is no need for a minimum threshold of short sales to reduce burden. Aggregating the position among all managers is ok, so long as the data is still present to see the individual net positions/transactions of each manager. Aggregation can help uncover trends that granular data can't, but the individual position data can help identify bad actors in the market more easily. As stated in the beginning, we have the technology to do this. Every manager that has a part of trading any form of security or derivative on any market should be forced to have a Legal Entity Identifier (LEI). That way, specific bad actors can be easily identified. If a firm/company refuses, they should not be allowed to trade or operate in any capacity until they comply. This will help to ensure all entities are playing by the rules, and not trying to avoid regulation.
Q3: Many of these questions I cannot speak to, not having direct experience as a manager at a financial institution. However, I still believe software that can synthesize a daily net position report would solve much of this issue. The information can be submitted to the SEC, which will maintain a database of each entities positions, and can identify if a position in a security is hedged with that same security or not. If not, the manager will have to select what of their other positions is considered the hedge, if any. This will cut down on the work managers have to do, since many institution hedge within the same security.
Q4: Again, all managers should have to report all short positions, and the net positions, along with the gross positions of all managers should be aggregated.
Q5: I believe that all short sales should be recorded and reported. The minimum threshold should be a single short sale. I believe any other threshold will spur institutions and managers to seek ways to avoid triggering the reporting thresholds. I believe this because financial entities again and again prove that they will avoid reporting information if possible. However, for thoroughness, to respond to the remaining questions about threshold reporting, managers should have to use the most recent closing price listed on a lit exchange when considering the threshold for a specific security.
Q6: All securities, including ETFs, OTC stocks, swaps etc. should have their positions data recorded and submitted to the SEC daily.
Q7: Daily updates to the positions should be made and submitted to the SEC. By continuous updating the positions, the overall workload will decrease, especially if software is used.
Q8: Daily updates to the positions should be made and submitted to the SEC. By continuous updating the positions, the overall workload will decrease, especially if software is used.
Q9: Daily updates to the positions should be made and submitted to the SEC. By continuous updating the positions, the overall workload will decrease, especially if software is used.
Q10: This sounds like it would lead to double counting of the short positions. If the ETF managers are reporting their short positions, and then another entity shorts a security from the ETF, then outside entity only has a single short position. There are now two short positions that should be reported, but if the outside entity reported both positions and the ETF reported their position, then three positions would be reported instead of the correct 2. Any entity shorting a security should report only their positions.
Q11: Daily updates to the positions should be made and submitted to the SEC. By continuous updating the positions, the overall workload will decrease, especially if software is used.
Q12: Every transaction throughout the day should have a manager's name associated with it. That would prevent double reporting of transactions. Or if multiple managers were responsible for trades of a specific security throughout the day, they should all take equal responsibility for the net positions at the end of the day. The former seems better, that way any malicious and illegal tactics can be traced back to a single manager.
Q13: Any and all false information should be corrected, no matter how small.
Q14: I like this approach. It has very granular data, and it allows the everyone to have access to data and spot big trends in the economy and markets.
Q15: I think this adds to much complexity to the system. If there is a short position in an account, then it needs to be closed/covered in that account. Otherwise, it might just be hedging.
Q16: I don't know.
Q17: Looking at the net short position allows for a short position to still exist and thre still be a need to buy-to-cover. That mismatch is wrong. Look at the gross short position instead.
Q18: I believe the market making exception could be used to circumvent the buy-to-cover marking system. As I stated in the intro, get rid of short selling, it's not needed. The markets will make themselves.
Q19: I think it will lead to greater transparency in the markets, which is a positive outcome of this rule change. The con would be that some financial institutions will probably still try to lie. Force every short sale to have a locate.
Q20: I don't know
Q21: My proposal of recording every sale via software would reduce the paperwork burden and capture every manager that participates in short sales of a security. I think all managers should be required to file SHO each month if they've changed their positions.
Q22: I don't know
Q23: I don't know
Q24: It should be a single-time burden. And yeah, 2 hours is probably about right for a competent programmer to complete this task.
Q25: I don't know
Q26: I don't know. It doesn't really matter when it needs to happen anyway. It's like if someone's car gets totaled. It doesn't really matter how much they were estimating it would cost to get a new car when they have to get one regardless. Do whatever it takes and impose whatever rules are needed to keep our markets safe from nefarious entities.
Q27: I don't know if that estimate is correct. Honestly it should probably be decreased because some short sellers will refuse to close if their trade is in the red and the security is doing well. But it depends on the data that has been used to make that assumption. Regardless, this transparency needs to happen so it doesn't really matter what the magnitude of all buy-to-cover transactions is.
Q28: As stated in Q27, some institutions will refuse to close their positions, which means that the number of short positions will probably be greater than the number of buy-to-cover positions, which can more easily uncover naked short selling, especially with the more granular data this rule change will implement.
Q29: I don't know
Q30: I don't know
Q31: In this market, it's probably about right. I still say that a more extensive real time recording system that isn't tampered with by managers that reports gross and net positions daily should be used.
Q32: I don't know
Q33: I don't know
Q34: I don't know
Q35: I skimmed the preceding part, but it seemed as though these data gathering systems still rely heavily on self reporting. This reliance on integrity is fine if everyone is completely honest, but it only takes one bad apple to ruin the bushel. There needs to be systems of reporting any and all trades/transactions that don't solely rely on the integrity of the participants, but an immutable log of events, then and only then will you have accurate data. Now the cost of designing and implementing this system might be prohibitive, but it is a worthy argument to make to congress to keep our markets transparent and free.
Q36: I think the rule change would indeed provide more information than can currently be observed. The buy-to-cover marking system as well as the threshold changes and categorization of data are all great steps to building a better picture of the true dynamics that affect a security.
Q37: I believe these changes will lead to better oversight of short selling from a reactionary standpoint. If the SEC believes that a security is being manipulated, it can more easily review the data under these new rules to see everyone's positions on a security as mentioned in the previous answer, and can more easily find nefarious actors. However, this is reactionary, not proactive prevention of the issue. And still relies on the integrity of all participants. There needs to be more direct oversight from the SEC as transactions are being made to ensure that illegal actions and manipulations are caught as soon as possible and can be undone in a timely manner.
Q38: See the above answer for my views on the effectiveness of the rule changes to enhancing market quality. See the introduction to this comment for my views on short selling being used for efficiency/market liquidity. In regard to protecting the privacy and propriety of the firms that do take a short position, many firms are already required to report their long positions and have them published. If a short is the analogous opposite of a long, then logically it should be reported and published as well. Plus, seeing as to how retail is not allowed to directly short stocks (besides participating in share lending, but we don't get to ask a holder to rent their shares), this is already an advantage institutions have against retail, and that information should be known to investors so they can make an informed decision about a security. Also, if institutions are confident in their positions (i.e. not just gambling) and truly believe that a stock is not worth the price it's at, they should be confident enough to have their name on it. And maybe not all the information about the short-position holders needs to be published to the public. Maybe some of that can be screened out before it is fit for public display, but I still believe that if entities are making moves that can substantially and singlehandedly affect a security, then that information should definitely be known.
Q39: XML is a widely used language and therefore implementation and maintenance would keep costs low and efficiency high. It would also allow for easy parsing and review of the data. The cost shouldn't vary very much between managers as the SHO form should be uniform for all managers, which means they will all use similar implementations to conform to its usage.
Q40: I don't know. I figure for the big firms that can be fined repeatedly for 10's of millions of dollars a year like it's nothing, because to them it is nothing, then this implementation should be considered nothing to them. To smaller managers, that cost might be prohibitive, but that means they should save up for it if they really want to short a stock (kind of like how in our personal lives we have to save up for stuff we really want to do or have, such as going on vacation, buying a home, or starting a family).
41: I believe that it might affect the decision of managers insomuch as they will find a way to continue the effect of short selling, but mask it through derivatives or similar techniques they come up with. It might lower returns for retirement and mutual funds if short selling slows down, that is undeniable. Of course, shorting usually drives the price of a stock down, so without excessive short positions, the unrealized returns might be better and offset it. There are other ways to make money such as selling calls and puts. Also, considering many predatory short sellers don't like to close their short positions, the mutual funds are the eventual losers as a synthetic share is returned to them and the short position remains open.
Q42: Considering we already see in todays market the use of derivatives to hide an entities short position, I would say this rule would make it more commonplace. If the initial infrastructure is already in place to report short positions, it should be cheaper to add on /expand to include other transaction types that act in similar ways to short selling or mask a short seller's position. The additional benefit to including other complex short positions would be a more transparent market and better information for investors and a company on the condition of their stock/security in the market. It provides safety to investors and confidence to companies that the SEC is monitoring conditions that could adversely affect a company's stock, promoting the security of the US markets.
43: I don't know if the analysis is thorough and accurate. See the introduction for my views on the argument of short selling for efficiency and liquidity.
Q44: The first several questions I answered included an alternative. Using a vetted software that can record any and all trades/transactions, it could send a net and pross positions report automatically to the SEC. This way relying on self reporting is avoided, and the risk of data manipulation is much lower. This software would most likely need to be some sort of blockchain technology to prevent any tampering. The cost of implementation and operation is prohibitive right now. However, many companies are building blockchains with \"Layer 2\" capabilities that significantly reduce the cost of operations (ex. from about 8 bucks in fees for a single transaction to a couple of pennies for that same transaction). This sort of implementation would be ideal for reporting and brings the cost back into the realm of possibility. That way the transactions could be recorded by software and at the end of a trading day all of them could be collated into a single report and submitted onto a blockchain, preventing any human reporting and manipulation of the data.
Q45: I don't know if these analyses are thorough enough, but I like and support all of these potential modifications.
Q46: I don't know if these analyses are thorough enough, but I like and support all of these potential modifications except for allowing the manager to only report the net short position. It is more elucidatory to have all the positions broken out.
Q47: I don't know if these analyses are thorough enough. I think any and all short positions should have to be disclosed (no threshold), but that's just my opinion.
Q48: I don't know if these analyses are thorough enough.