(Source: SEC)
Generally speaking, when Wall Street institutional investors are shorting a certain stock or bond, they can sell it by short selling, and then buy it back at a lower price after the value of the security falls as scheduled, and the difference earned is the profit of shorting. On average, $1.8 trillion worth of securities are lent out in U.S. financial markets each year, according to the Insurance Regulator.
As for the short-selling data of the US stock market, the main sources at present are FINRA (the US Financial Industry Regulatory Authority) and the major exchanges. Short volume data is published daily by FINRA and the exchange, while the more critical Short Interest is reported to FINRA by members twice a month. In other words, there will be a gap of about 10 days between the completion of the transaction and the disclosure of the data.
For this "this has been the case for more than a decade" rule, the opportunity to change occurred in the "retail war against Wall Street short sellers" in early 2021, and individual stocks that were targeted (such as Game Post) showed a strange situation in which the number of short selling shares was more than the number of company shares. This also prompted regulators to step in to close loopholes in the short-selling rules, facilitating the agenda of tightening the credit system with the introduction of the Sunshine Act at the end of that year.
In one of the most discussed aspects of the rule, the SEC requires lenders to file within 15 minutes of each transaction. At the same time, the relevant trading information will be disclosed to the whole market after the buyer and seller information is hidden.
The demand has also sparked a backlash from Wall Street institutions, which fear the burden of the letter is too heavy, and investors, who fear it will "expose" their positions. The Investment Company Institute, which represents most short-selling funds, has publicly warned that the 15-minute rule would increase the cost of short selling and that such quick disclosure would make it easier for high-frequency traders to gain an advantage.
ICI spokesman Stephen Bradford publicly criticized the rule as another example of the SEC's indifference to costs and ripple effects.
Of course, under SEC rules, tomorrow the five-member committee could vote not only up or down, but also in favor of a rule change. Some market participants have also called on the SEC to relax the time limit on margin lending from 15 minutes to a unified reporting at the end of the day's trading.
The rules of Wall Street are changing fast
On Tuesday, the SEC approved another rule tightening the letter guarantee system: for active investors who increase their holdings beyond the 5% reporting line, the mandatory letter guarantee period will be reduced from 10 days to five days. In the SEC's own words, the last time this rule was revised was in 1977.
The rule is also seen as an effort by the SEC to strengthen its oversight of the private fund industry, because shorter reporting cycles mean funds have less time to stay in the shadows and build positions. Gensler commented that in today's rapidly changing market, the public should not have to wait 10 days to learn that someone wants to change or affect the control of a public company.
For those investors who do not have a controlling interest (such as qualified institutional investors), the new rules will also reduce the reporting time from a natural year to 45 days, but passive investors will still need to complete the report within five days.
The new rules also require investors who cross the 5% stake line to report all positions related to the company, which also includes securities swaps. This is also a way for many active investors to "secretly collect chips", the more famous one is Bill Hwang, which led to the "century big explosion" of China concept stocks.
Some hedge funds have warned that the rule could make active investing less attractive. When they silently build a position, they may be discovered by their peers and enter the competition. The Alternative Investment Management Association (AIMA) has commented that a shorter reporting time frame would reduce market efficiency as investors now have less incentive to proactively identify and fix mismanaged companies.
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