February 7, 2022
Hello,
I am a retail trader who follows the markets with great enthusiasm. Even if I choose to not trade certain securities, my background in economics still leads me to monitor the market from a macro standpoint as a personal hobby.
The fact that this proposal needs to exist in the first place is disheartening. Anyone who believes that we do not need more transparency in the market after what occurred in 2008 is not fit to serve the SEC in my opinion. More transparency/data is ALWAYS better.
Retail is already at a disadvantage. Theres a reason we are referred to as dumb money. We do not have access to the same information as hedge funds, investment banks, and other institutions. The current reporting requirements for these organizations are laughable at best.
13Fs are a great start. But the fact that short positions are self-reported while their cousins (long positions) have a lot more hoops to jump through, makes absolutely zero sense. How many times have firms accidentally marked short positions as long? Or put a comma in the wrong spot? I can give plenty of examples. And why do firms do this? Because even if the SEC fined them, its pennies on the dollar and simply a cost of doing business. These short positions need to be audited and greater fines established.
Derivatives are a whole new ballgame. How do shorting hedge funds essentially hide short interest in the underlying security? Easy - Equity Total Return Swaps. A hedge fund can use these derivatives to keep true/traditional short positions off of their balance sheets even while they are effectively short via their exposure to this new derivative. This is a blatant means around Reg Sho and an easy avenue to allow for naked shorting without reporting a short position.
And the worst part? These swaps fall outside of the jurisdiction of the OCC. So there really isnt anyone to monitor these positions and the massive liability they create for the market. Asking firms to self-report these swaps is a start (this proposal). Audits and tougher guidelines need to be created as well. Lets be honest, the creation of these swaps is a clear means to get around reg sho since it only deals with the underlying. Lets update our swap and short position reporting/auditing and also update Reg Sho to include effective naked shorting via derivatives - because it IS happening.
Short selling can be a great way to fix price discovery and look for fraud. But nowadays it seems that more and more hedge funds are no longer looking for undervalued companies to invest in and are instead looking for weak companies where they can short sell their stock to oblivion, abuse derivatives to circumvent Reg Sho, and use the MSM to attack the companies that they are directly or indirectly shorting. Naked Short selling is illegal but its also profitable and easily hidden with current reporting metrics. This is one area where the EU has us beaten. Naked short selling drops an underlyings current price - so every time these actions take place, the short seller is gaining ground. Imagine going to a casino with unlimited funds and being told that every time you made a bet, your odds of winning would increase. You would continue to bet until you were unable to continue. Thats effectively what these short hedge funds are doing. Every time they naked short sell (either traditionally or with unreported swaps), they are increasing their odds of profiting at the expense of long share holders and the company itself. Since these are naked, they dont even have to borrow a security first. They can effectively do this to infinity, which again, increases their odds of winning with every short sale. Its the casino analogy. It makes absolutely zero sense.
We are counting on you Gary.
Thanks,
Avery Withrow