Short Sale Reporting Study Required by Dodd-Frank Act Section 417(a)(2), 26787-26791 [2011-11188]
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Federal Register / Vol. 76, No. 89 / Monday, May 9, 2011 / Notices
organization consents, the Commission
will:
(A) By order approve or disapprove
such proposed rule change, or
(B) institute proceedings to determine
whether the proposed rule change
should be disapproved.
IV. Solicitation of Comments
Interested persons are invited to
submit written data, views, and
arguments concerning the foregoing,
including whether the proposed rule
change is consistent with the Act.
Comments may be submitted by any of
the following methods:
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Electronic Comments
• Use the Commission’s Internet
comment form (https://www.sec.gov/
rules/sro.shtml); or
• Send an e-mail to rulecomments@sec.gov. Please include File
Number SR–FINRA–2011–018 on the
subject line.
should be submitted on or before May
31, 2011.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.34
Cathy H. Ahn,
Deputy Secretary.
[FR Doc. 2011–11190 Filed 5–6–11; 8:45 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–64383; File No. 4–627]
Short Sale Reporting Study Required
by Dodd-Frank Act Section 417(a)(2)
Securities and Exchange
Commission.
ACTION: Request for comment.
AGENCY:
The Securities and Exchange
Commission (‘‘Commission’’), on behalf
of its Division of Risk, Strategy, and
Paper Comments
Financial Innovation (‘‘Division’’), is
requesting public comment with regard
• Send paper comments in triplicate
to studies required by the Dodd-Frank
to Elizabeth M. Murphy, Secretary,
Wall Street Reform and Consumer
Securities and Exchange Commission,
Protection Act of the feasibility,
100 F Street, NE., Washington, DC
benefits, and costs of requiring reporting
20549–1090.
in real time, either publicly or, in the
All submissions should refer to File
Number SR–FINRA–2011–018. This file alternative, only to the Commission and
the Financial Industry Regulatory
number should be included on the
subject line if e-mail is used. To help the Authority (‘‘FINRA’’), of short sale
positions of publicly listed securities,
Commission process and review your
and of conducting a voluntary pilot
comments more efficiently, please use
only one method. The Commission will program in which public companies
post all comments on the Commission’s would agree to have all trades of their
shares marked ‘‘long,’’ ‘‘short,’’ ‘‘market
Internet website (https://www.sec.gov/
maker short,’’ ‘‘buy,’’ or ‘‘buy-to-cover,’’
rules/sro.shtml). Copies of the
and reported as such in real time
submission, all subsequent
through the Consolidated Tape.
amendments, all written statements
DATES: Comments should be received on
with respect to the proposed rule
or before June 23, 2011.
change that are filed with the
Commission, and all written
ADDRESSES: Comments may be
communications relating to the
submitted by any of the following
proposed rule change between the
methods:
Commission and any person, other than
Electronic Comments
those that may be withheld from the
public in accordance with the
• Use the Commission’s Internet
provisions of 5 U.S.C. 552, will be
comment form (https://www.sec.gov/
available for website viewing and
rules/other.shtml); or
• Send an e-mail to ruleprinting in the Commission’s Public
comments@sec.gov. Please include File
Reference Room, 100 F Street, NE.,
Number 4–627 on the subject line.
Washington, DC 20549, on official
business days between the hours of 10
Paper Comments
a.m. and 3 p.m. Copies of such filing
• Send paper comments in triplicate
also will be available for inspection and
to Elizabeth M. Murphy, Secretary, U.S.
copying at the principal office of
Securities and Exchange Commission,
FINRA. All comments received will be
posted without change; the Commission 100 F Street, NE., Washington, DC
20549–1090.
does not edit personal identifying
information from submissions. You
All submissions should refer to File
should submit only information that
Number 4–627. To help us process and
you wish to make publicly available. All review your comments more efficiently,
submissions should refer to File
34 17 CFR 200.30–3(a)(12).
Number SR–FINRA–2011–018 and
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please use only one method. The
Commission will post all comments on
the Commission’s Internet Web site
(https://www.sec.gov). Comments will
also be available for Web site viewing
and printing in the Commission’s Public
Reference Room, 100 F Street, NE.,
Washington, DC 20549, on official
business days between the hours of 10
a.m. and 3 p.m. All comments received
will be posted without change; we do
not edit personal identifying
information from submissions. You
should submit only information that
you wish to make available publicly.
FOR FURTHER INFORMATION CONTACT:
Amy Edwards, Assistant Director, Bruce
Kraus, Co-Chief Counsel, Lillian Hagen,
Special Counsel, Sandra Mortal,
Financial Economist, Division of Risk,
Strategy, and Financial Innovation, at
(202) 551–6655, Securities and
Exchange Commission, 100 F Street,
NE., Washington, DC 20549–4977.
Discussion:
Under Section 417(a)(2) of the DoddFrank Wall Street Reform and Consumer
Protection Act (the Dodd-Frank Act),1
the Commission’s Division of Risk,
Strategy, and Financial Innovation is
required to conduct studies of the
feasibility, benefits, and costs of (A)
requiring reporting in real time, publicly
or, in the alternative, only to the
Commission and the Financial Industry
Regulatory Authority, short sale
positions in publicly listed securities,
and (B) conducting a voluntary pilot
program in which public companies
could agree to have sales of their shares
marked ‘‘long,’’ ‘‘short,’’ or ‘‘market
maker short,’’ and purchases of their
shares marked ‘‘buy’’ or ‘‘buy-to-cover,’’
and reported as such in real time
through the Consolidated Tape.2
In the Division’s estimation, data
made public by certain self-regulatory
organizations (‘‘SROs’’) indicate that
orders marked ‘‘short’’ under current
regulations account for nearly 50% of
listed equity share volume.3 Short
1 Public
Law 111–203 (July 21, 2010).
term ‘‘Consolidated Tape,’’ as used
throughout this release, refers to the current
reporting systems for transactions in all exchangelisted stocks and ETFs. These systems include
Tapes A and B of the Consolidated Tape Plan and
Tape C of the Unlisted Trading Privileges or ‘‘UTP’’
Plan. Trades in New York Stock Exchange
(‘‘NYSE’’)-listed securities are reported to Tape A;
trades in NYSE–Amex, NYSE–Arca, and regional
exchange-listed securities are reported to Tape B;
and trades in NASDAQ-listed securities are
reported to Tape C. Transactions in unlisted
equities, options, or non-equity securities are not
currently reported to the Consolidated Tape. For
more information see https://www.nyxdata.com/cta
and https://www.utpplan.com/.
3 This estimate was made by the Division based
on short selling volume data for June 2010 made
2 The
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Federal Register / Vol. 76, No. 89 / Monday, May 9, 2011 / Notices
selling involves a sale of a security that
the seller does not own or a sale that is
consummated by the delivery of a
security borrowed by, or for the account
of, the seller.4 Typically, the short seller
later closes out the position by
purchasing equivalent securities on the
open market and returning the security
to the lender.5 In general, short selling
is used to profit from an expected
downward price movement, to provide
liquidity in response to unanticipated
demand, or to hedge the risk of an
economic long position in the same
security or in a related security.6
To better inform the study required by
Section 417(a)(2) of the Dodd-Frank Act,
the Commission, on behalf of the
Division, seeks comment on both the
existing uses of short selling in
securities markets and the adequacy or
inadequacy of currently available
information regarding short sales, as
well as comment on the likely effect of
these possible future reporting regimes
on the securities markets, including
their feasibility, benefits, and costs.
The Commission is required to submit
a report on the results of these studies
to Congress no later than July 21, 2011.
All interested parties are invited to
submit their views, in writing.
Empirical evidence relevant to any part
of the Division’s study is expressly
requested.
I. Baseline
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Certain information regarding short
sales is currently available to the public.
This information includes the total
‘‘short interest’’ in each listed security
(i.e., total shares in short positions in
that security in all customer and
proprietary firm accounts of FINRA
member firms), which has been reported
twice each month since 2007,7 as well
available by SROs. This estimate is consistent with
estimates for prior months, and the short percentage
varied little from day to day. The underlying data
can be found at hyperlinks available at https://
www.sec.gov/answers/shortsalevolume.htm, and
have been provided since August 2009 by the SROs
listed therein. As indicated on these hyperlinks,
‘‘short selling volume’’ is the volume of executed
orders marked ‘‘short’’ or ‘‘short exempt’’ pursuant
to Rule 200(g) of Regulation SHO (which requires
broker-dealers to mark all equity sell orders as
either ‘‘long,’’ ‘‘short,’’ or ‘‘short-exempt’’). See 17
CFR 242.200(g). Under current rules, these order
marks are not submitted to or reported on the
Consolidated Tape, but are maintained as part of
broker-dealers’ books and records pursuant to Rules
17a–3 and 17a–4. See 17 CFR 240.17a–3(a)(5)–(7)
and 240.17a–4(b)(8).
4 See 17 CFR 242.200(a).
5 See Exchange Act Release No. 50103 (July 28,
2004), 69 FR 48008 (Aug. 6, 2004) (‘‘Regulation SHO
Adopting Release’’), available at https://
www.sec.gov/rules/final/34–50103.htm.
6 See, e.g., id.
7 See FINRA Rule 4560. FINRA member firms
must report total shares in short positions in all of
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as data made available more recently on
the short selling volume for each listed
equity security that is reported on a
daily basis,8 and trade-by-trade short
sale transaction data that is released on
a delayed (no more than 30 days after
the end of the month) basis.9
Additionally, certain data vendors offer
stock lending data, including stock loan
volume, lending costs, and the
percentage of available stock out on
loan, which some market commentators
have used as measures of short selling.10
Further, Section 929X(a) of the DoddFrank Act amended Section 13(f) of the
Securities Exchange Act of 1934
(‘‘Exchange Act’’) to require the
Commission to adopt rules requiring
monthly (or potentially more frequent)
public short sale disclosures by security,
including the ‘‘aggregate amount of the
number of short sales of each security,
and any additional information
determined by the Commission.’’ 11
Q1. How are currently available data
used by issuers, market participants,
and others (such as SROs, data vendors,
media, analysts, and academics) today?
How widely distributed are currently
available data? Do costs or other factors
limit access to currently available data?
Are there other important sources of
information as to short sales and short
sale positions in addition to those
mentioned above?
Q2. The Division understands that
equity market makers rely on short
selling to facilitate customer buy orders
and to ensure that they can maintain
two-sided markets without carrying
their customer and proprietary firm accounts in all
equity securities twice per month through FINRA’s
Web-based Regulation Filing Application (‘‘RFA’’)
system. The short interest data in listed stocks is
released by exchanges that list those stocks.
Further, FINRA releases the short interest data in
unlisted stocks.
8 See supra note 3 for more information on this
data and how to obtain it.
9 These data sets include one observation for each
execution involving a short sale and typically date
from August 2009. These data sets can be found at
hyperlinks available at https://www.sec.gov/answers/
shortsalevolume.htm.
10 Data Explorers and SunGard, for example,
provide data on securities lending to clients. As
some commentators have noted, stock lending
facilitates short selling (see, e.g., Speech by Chester
Spatt, available at https://www.sec.gov/news/speech/
2007/spch042007css.htm). As noted above, a
number of data vendors sell information as to
shares that have been loaned to other investors.
Among other things, this information may include
volume of loans, lending costs, and the percentage
of available stock out on loan. This data offers
indirect evidence of short selling, and some
research has used stock lending data as a proxy for
actual short sales. See, e.g., Oliver Wyman, ‘‘The
effects of short selling public disclosure of
individual positions on equity markets’’ (Feb. 2011),
available at https://www.oliverwyman.com/ow/
pdf_files/OW_EN_FS_Publ_2011_Short_Selling
_Public_Disclosure_Equity_Markets.pdf.
11 See Exchange Act Section 13(f)(2), as amended.
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large risky positions. The Division also
understands that option market makers
frequently sell short to hedge positions
taken in the course of market making
activities.12 Why else might market
makers sell short? How much of all
short selling is accounted for by bona
fide market making? Do market makers
sell short for purposes other than bona
fide market making? 13 Are there ways
in which short sales by market makers
and other market participants
performing similar roles or functions
(but that are not subject to some or all
of the requirements applicable to market
makers) could be viewed as
problematic?
Q3. The Commission requests
comment on the ways and the extent to
which, if any, commenters believe that
short selling has been associated with
abusive market practices, such as ‘‘bear
raids’’ where an equity security is sold
short in an effort to drive down the
security’s price by creating an
imbalance of sell-side interest? 14 In
addition, the Commission requests
comment on the ways and extent to
which, if any, commenters believe
trade-based manipulation (i.e.,
manipulating without a corporate action
or spreading false information) 15 using
short sales is possible? Would greater
transparency of short positions or short
sale transactions help to better deter or
prevent such abuses, or assist in
additional appropriate actions to
prevent them? If so, what new
disclosures should be required?
II. Position Reporting
Section 417(a)(2)(A) of the DoddFrank Act requires the Division to
conduct a study of short ‘‘position’’
12 See, e.g., Exchange Act Release No. 58775 (Oct.
14, 2008), 73 FR 61690 (Oct. 17, 2008).
13 In adopting Regulation SHO, the Commission
discussed several activities that are not bona fide
market making. Specifically, the Commission stated
bona fide market making: (1) ‘‘does not include
activity that is related to speculative selling
strategies or investment purposes of the brokerdealer and is disproportionate to the usual market
making patterns or practices of the broker-dealer in
that security’’; (2) ‘‘where a market maker posts
continually at or near the best offer, but does not
also post at or near the best bid, the market maker’s
activities would not generally qualify as bona fide
market making for purposes of the exception’’; and
(3) ‘‘does not include transactions whereby a market
maker enters into an arrangement with another
broker-dealer or customer in an attempt to use the
market maker’s exception for the purpose of
avoiding compliance with Rule 203(b)(1) by the
other broker-dealer or customer.’’ Exchange Act
Release No. 50103, 69 FR 48008, 48015 (Aug. 6,
2004) (citations omitted).
14 See, e.g., Exchange Act Release No. 61595 (Feb.
26, 2010), 75 FR 11232, 11235 (Mar. 10, 2010).
15 For a discussion of the theory regarding trade
based manipulation, See Allen, F. and D. Gale,
‘‘Stock Price Manipulation,’’ (1992) Review of
Financial Studies, 5(3), 503–529.
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reporting; the term ‘‘position’’ is not
defined in the Exchange Act or in
Section 417 of the Dodd-Frank Act. For
purposes of this study, the Division
plans to use ‘‘position’’ to refer to
outstanding holdings at a point in time.
Further, Section 417 of the Dodd-Frank
Act does not specify a particular level
of aggregation and netting, address
whose positions would be reported, or
indicate whether derivatives or other
ways to obtain economic exposure to a
stock are covered and existing U.S.
regulatory definitions vary in this
dimension.16 ‘‘Economic exposure’’ as
used by the Division in this request for
comment refers to any financial interest
in a company, however acquired. For
example, an investor may have
economic exposure to a company by
owning the stock itself, or through
ownership of an index or of derivatives.
Likewise, the short sale position
reporting requirements in foreign
jurisdictions, implemented or proposed,
differ from one another in a number of
areas with respect to the definition of
‘‘position,’’ including inclusion or
exclusion of derivatives in the short
interest calculation, and reporting of net
or gross position. For example, the short
interest calculation in Australia 17 and
Hong Kong 18 does not or would not
include derivatives, whereas the U.K. 19
and a proposal by the European Union
(the ‘‘E.U. Proposal’’) 20 both include or
would include them. In Australia,21 the
16 FINRA defines a short position as resulting
from ‘‘short sales’’ as that term is defined in Rule
200(a) of Regulation SHO, but captures the position
as of a settlement date as opposed to a trading date.
See FINRA Rule 4560. The Commission defined a
short selling position in former Rule 10a3–T as ‘‘the
aggregate gross short sales of an issuer’s Section
13(f) securities (excluding options), less purchases
to close out a short sale in the same issuer,’’ and
stated that ‘‘the Form SH short position is not net
of long position.’’ See Exchange Act Release No.
58785 (Oct. 15, 2008), 73 FR 61678 (Oct. 17, 2008).
The reporting requirements of Form SH were in
effect from September 22, 2008 to August 1, 2009.
17 See Corporations Regulations 2001
(Commonwealth), regulation 7.9.99(2) (Australia),
indicating that the short interest calculation
includes securities, managed investment products,
and sovereign debentures, stocks or bonds.
18 See Hong Kong Securities and Futures
Commission, Consultation Conclusions on
Increasing Short Position Transparency (Mar. 2,
2010), available at https://www.sfc.hk/sfc/doc/EN/
speeches/consult/
consultationconclusion2march2010english.pdf.
19 Short Selling Rules, 2010, FINMAR 2010
(U.K.), ¶ 2.3.6.
20 The Committee for European Securities
Regulators (‘‘CESR’’) proposed to require that
positions be netted at the legal entity level and
include all financial instruments that create
economic exposure to an issue. See CESR, Model
for a Pan-European Short Selling Disclosure
Regime, CESR/10–088 (Mar. 2010) (‘‘E.U. Model’’),
at 9.
21 See Corporations Regulations 2001 regulation
7.9.99 (Australia), which states that ‘‘a short
position is short sales net of long positions.’’
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E.U. Proposal,22 and the U.K.,23 the
reportable position is or would be the
net short position, while in Hong Kong,
long interest and short positions are
calculated separately and are not
netted.24
Q4. Would real time reporting of the
short positions of all investors,
intermediaries, and market participants
be feasible, and if so, in what ways
would it be beneficial? What problems
would it address? What would be any
reasons, in terms of benefits and costs,
for treating short sale position reporting
differently than long position reporting?
Would ‘‘real time’’ reporting be
necessary to achieve these benefits, or is
‘‘prompt’’ updating for material changes
in the short position (such as Schedule
13D updating requirements)
sufficient? 25 If real time reporting
would be beneficial, should ‘‘real time’’
be defined as ‘‘continuously updated as
soon as practicable,’’ or as frequent
‘‘snapshots’’ of short positions
throughout the trading day? Should ‘‘as
soon as practicable’’ be defined and, if
so, how? If frequent short sale position
reporting of some kind would be
beneficial, how frequently should such
reports be made in order to realize those
benefits? Would real time data be more
or less accurate than data reported on a
delay? Please explain why or why not.
Q5. Who would be likely to use real
time short position data, and how?
Would the short sale position data be
too voluminous to be used directly by
investors? Could such data help to
detect more easily, better deter, or better
prevent short selling abuses? Would
market commentators and others use
real time short position data to help the
public better understand the U.S.
securities markets? Would users of real
time short position data be able to
derive reasonably clear interpretations
of the data in real time, and, to the
extent they could not, how would the
costs and benefits of any reporting
regime be affected? Would real time
data on short positions help or hinder
long-term investors in making ‘‘efficient
investments?’’26
22 E.U.
Model, at 9.
(U.K.), at ¶ 2.3.2.
24 See Hong Kong Securities and Futures
Commission, Consultation Conclusions on
Increasing Short Position Transparency (Mar. 2,
2010), available at https://www.sfc.hk/sfc/doc/EN/
speeches/consult/
consultationconclusion2march2010english.pdf.
25 Exchange Act Rule 13d–2 requires that if there
is any material change in the facts set forth in a
Schedule 13D, including, but not limited to, any
material increase or decrease in the percentage of
the class beneficially owned, the person required to
file the statement must promptly file an amendment
disclosing the change. See 17 CFR 240.13d–2.
26 See, e.g., Biagio Bossone, Sandeep Mahajan,
and Farah Zahir, Financial Infrastructure, Group
23 FINMAR
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Q6. How would real time data on
short positions affect the behavior of
short sellers and other investors? Would
it affect abusive short selling, in
particular? To what extent, if any,
would such data deter non-abusive
short selling? For example, would such
data reveal the trading strategies of nonabusive short sellers? Could the
availability of such data create new
opportunities for unfair or otherwise
abusive market practices, such as bear
raids or short squeezes? Could real time
data on short positions lead to copycat
trading? 27 How would real time data on
short positions affect investor
confidence?
Q7. How would real time data on
short positions affect liquidity,
volatility, price efficiency, competition,
and capital formation? Would real time
short position reporting affect equityrelated securities markets, such as
option or other derivative markets,
convertible bond or other debt markets?
If so, in what ways?
Q8. How should ‘‘position’’ be defined
to help ensure any short sale position
reports would be useful in detecting and
deterring abusive short sale practices?
Should ‘‘position’’ be defined differently
to accomplish another purpose? If so,
how, and what purpose would such a
definition help accomplish? Would
there be a trade-off between minimizing
incremental implementation costs,
above the cost of existing short reporting
systems and procedures, in the context
of a short position reporting regime and
its utility? For maximum utility, should
short positions be reported gross, or net
of long positions, or in both ways?
Should short positions include
derivatives and index components?
Should short positions be the net
economic exposure to a stock across all
instruments? Should short positions be
defined as in former Rule 10a3–T, in
which ‘‘the Form SH short position is
Interests, and Capital Formation (International
Monetary Fund, Working Paper 03/24, 2003),
available at https://www.imf.org/external/pubs/ft/
wp/2003/wp0324.pdf. Efficient investments
optimize an investor’s utility when trading off
expected return and risk. If investors can more
accurately estimate expected returns and risk, then
they are better able to make efficient investments.
For a summary of the underlying theory, see Bodie,
Kane, and Marcus Investments, 7th ed. Chapters 8,
11, and 12.
27 Copycat trading is a form of ‘‘herd behavior,’’
which has been described as ‘‘[t]he tendency of
investors, like herd animals, to follow the group.
Such conformity can give rise to bubbles in
individual securities and market sectors.’’ Library of
Congress, Federal Research Division, Annotated
Bibliography on the Behavioral Characteristics of
U.S. Investors (Aug. 2010), available at https://
www.loc.gov/rr/frd/pdf-files/SEC_AnnotatedBibliography.pdf.
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not net of long position?’’ 28 In the case
of broker-dealers, should position
reporting be based on existing
Regulation SHO aggregation units
within broker-dealers,29 for the brokerdealer taken as a whole, or for its
holding company? Please describe the
feasibility of any incremental changes to
the existing short sale reporting systems
that would be necessary to report short
sale ‘‘positions.’’ Would any potential
definitions of short positions be
infeasible in real time?
Q9. What would be the benefits and
costs of short position reporting if
‘‘position’’ was defined to mean short
interest,30 which would be the aggregate
number of shares short in each stock?
Would real time public reporting of
aggregate short interest be feasible? If so,
what problems would it address, and
how (and by whom) would this data be
used? Should the position reporting to
be examined in the Division’s study be
more comprehensive than the current
bi-monthly short interest reporting? For
example, ‘‘arranged financing’’ (which
would include borrowing from a foreign
bank or affiliate to cover short positions)
is not currently included in short
interest. What would be the impact of
including arranged financing in a
definition of short position?
Q10. What would be the feasibility,
benefits, and costs of real time short
position reporting to regulators only,
and not to the public? What would the
benefits and costs be if this real time
reporting information were to be made
public on a delayed basis? What length
of delay might best balance any benefits
and costs?
Q11. Who would be in a position to
report short positions in real time?
Would broker-dealers be able to
accurately report customer short
positions in real time? Would anyone
else be better suited? Would short
sellers themselves be equipped to report
their own short positions in real time?
Would anyone but the short seller be in
a position to report the short seller’s
short position, whether or not the short
position was defined as the short seller’s
economic position including
derivatives? What would be the
feasibility of adapting the technology
infrastructure that supports existing
reporting requirements to support real
time short position reporting?
Q12. Who would be in a position to
collect and disseminate short positions
in real time? Would it be feasible for
28 See
supra note 16.
200(f) of Regulation SHO permits a brokerdealer, under certain conditions, to calculate its
long or short position by independent trading-unit,
rather than on a firm-wide basis. 17 CFR 242.200(f).
30 See supra note 7.
29 Rule
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listing exchanges to collect and
disseminate this information? Would a
consolidator be better suited to collect
this information? What would be the
feasibility of adapting the technology
infrastructure supporting existing
reporting requirements to support real
time short position collection and
dissemination? Would short position
data developed from existing systems be
less meaningful than data from a new
system designed for this purpose? Why
or why not?
Q13. What would be the direct,
quantifiable costs of short position
reporting for those compiling, reporting,
collecting, or disseminating the data?
Please differentiate implementation
costs from ongoing costs and include
opportunity costs. How feasible would
it be for brokers, exchanges, and others
to create or modify a reporting and
dissemination system? What would be
the particular technological challenges
faced in creating or modifying a
reporting and dissemination system?
Responses based on the costs of
implementing the 2007 modifications to
short interest reporting 31 or the 2008
implementation of Form SH 32 are
particularly requested.
Q14. How would the establishment of
a significant reporting threshold, which
would limit short position reporting
requirements to holders of significant
net short positions, affect costs and the
utility of the short position information?
If reporting thresholds would be useful,
would thresholds at the 5% level used
under Section 13(g) of the Exchange Act
or the 0.25% level used in former Form
SH 33 be appropriate, or would a lower
threshold, such as that used in the U.K.
model, be preferable? 34 Or would a
31 See
supra note 7.
requirement was instituted via three
emergency orders (dated Sep. 18, 2008, Sep. 21,
2008, and Oct. 2, 2008), which implemented
Exchange Act Rule 10a–3T (See Exchange Act
Release No. 58785 (Oct. 15, 2008), 73 FR 61678
(Oct. 17, 2008)). Comments are available at
https://www.sec.gov/comments/s7-31-08/
s73108.shtml.
33 Certain institutional investment managers were
required to report short sales of certain securities
on former Form SH unless the short position
constituted less than 0.25% of the class of shares
and had a fair market value of less than
$10,000,000. See Exchange Act Release No. 58785
(Oct. 15, 2008), 73 FR 61678 (Oct. 17, 2008).
34 Two types of short positions must be publicly
disclosed in the U.K. A net short position of 0.25%
and above of issued capital in a U.K. company
involved in a rights issue must be disclosed. In
addition, a net short position in a U.K. financial
sector company must be disclosed initially when
such interest exceeds 0.25% of total share capital,
and on an ongoing basis when the position exceeds
or falls below 0.25%, 0.35%, 0.45% and 0.55% and
each 0.1% threshold thereafter. See FINMAR
§§ 2.2.1, 2.1.2. See also U.K. Financial Services
Authority, ‘‘Implementing Aspects of the Financial
Services Act 2010’’ (2010), at 2.13.
32 This
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Fmt 4703
Sfmt 4703
higher threshold be appropriate? Please
explain why or why not. Would
thresholds (computed on a net basis) at
U.K. levels (or the lower levels being
contemplated by the E.U.) 35 capture
ordinary course, bona fide market maker
positions, or would they tend generally
to capture only the positions of
investors taking a view as to the stock’s
future price direction? Would a general
exemption from position reporting (or
public position reporting) for market
makers be appropriate? Why or why
not?
Q15. How should experiences with
short sale position reporting regimes in
foreign jurisdictions 36 inform the
analysis of feasibility, benefits, and
costs? How relevant are any analyses of
other reporting regimes to the Division’s
study? 37 The Commission requests
information on any relevant studies not
cited in this request for comment.
III. Transaction Reporting
The Commission requests comment,
on behalf of the Division, on the
feasibility, benefits, and costs of the
Consolidated Tape collecting and
disseminating certain transaction marks.
Specifically, Section 417(a)(2)(B) of the
Dodd-Frank Act requires the Division to
study the feasibility, benefits, and costs
of conducting a voluntary pilot program
in which public companies would agree
to have all trades of their shares marked
‘‘long,’’ ‘‘short,’’ and/or ‘‘market maker
short’’ (for the sell portion(s) of the
trade), and ‘‘buy’’ and/or ‘‘buy to cover’’
(for the buy portion(s) of the trade) and
reported in real time through the
Consolidated Tape.
Q16. What benefits, costs, or
unintended consequences would flow
from adding these transaction marks to
the Consolidated Tape? Who would use
these marks, and how? Would data from
the Consolidated Tape be accessible to
the market participants who are most
interested in short selling information?
Would the Consolidated Tape data be
too voluminous to be used directly by
35 The E.U. Model would require reporting to
regulators when short interest exceeds 0.2% of
issued share capital, and reporting to the public
when it exceeds 0.5% of issued share capital. See
E.U. Model, at 8–9.
36 See supra notes 17–24, 34, and 35 for
examples.
37 See Oliver Wyman Report, supra note 10, and
also U.K. Financial Services Authority, Short
selling: Feedback on DP09/1, 09/4 (Oct. 2009),
available at https://www.fsa.gov.uk/pubs/discussion/
fs09_04.pdf; European Commission, Impact
Assessment on the Proposal for a Regulation of the
European Parliament and of the Council on Short
Selling and Certain Aspects of Credit Default
Swaps, SEC(2010) 1055 (Sep. 15, 2010), available at
https://ec.europa.eu/internal_market/securities/
docs/short_selling/
20100915_impact_assessment_en.pdf.
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interested market participants? How
would the Consolidated Tape marks
affect the behavior of short sellers and
other investors? Would Consolidated
Tape marks help or hinder long-term
investors in making ‘‘efficient
investments?’’ 38 Would market
commentators and others use
Consolidated Tape marks to help the
public better understand markets?
Could such marks help to better detect,
deter, or prevent identified short selling
abuses? Alternatively, could such marks
themselves present opportunities for
alleged unfair or otherwise abusive
market practices, such as bear raids or
short squeezes? Would real time
Consolidated Tape marks lead to
copycat trading? How would
Consolidated Tape marks affect investor
confidence?
Q17. Please discuss the feasibility,
benefits, and costs related to the ‘‘short
sale,’’ ‘‘market maker short,’’ and ‘‘buy-tocover’’ marks specifically, and the
effects of any choices that would be
made when defining such terms. Would
there be a trade-off between defining the
trades that would be subject to these
marks for maximum utility and
accuracy to investors, and minimizing
implementation costs by building on
existing definitions and order marking
infrastructure? 39 If so, how should the
tension between these goals be best
resolved? Would there be any other
potential issues associated with the
accuracy or clarity of Consolidated Tape
marks? Would the Consolidated Tape
marks present possibilities for
misinterpretation of the data that could
impact any benefits and costs?
Q18. How would any additions to
Consolidated Tape marks affect
liquidity, volatility, price efficiency,
competition, and capital formation? To
what extent, if any, would such data
deter short selling activity not
associated with abusive market
practices, but that enhances market
quality, for example, by revealing
trading strategies? What are the
consequences of such deterrence?
Would any additions to Consolidated
Tape marks have consequences
(including benefits or costs) for equityrelated securities markets, such as
options or other derivative markets,
convertible bond or other debt markets?
If so, please explain. What would the
feasibility, benefits, and costs be if this
real time reporting information were to
be made public on a delayed basis?
What length of delay might best balance
any benefits and costs?
38 See
39 See
supra note 26.
supra note 3.
VerDate Mar<15>2010
15:23 May 06, 2011
Jkt 223001
Q19. What would be the direct,
quantifiable costs of adding the
additional fields to the Consolidated
Tape to support new marks? Please
differentiate implementation costs from
ongoing costs and include opportunity
costs. How feasible would it be for
brokers, exchanges, and others to
modify order management systems, or
other systems, for these marks? What
would be the potential technological
challenges faced in implementing these
marks? Would the Consolidated Tape
bear significant implementation or
ongoing costs? For example, would
capacity requirements be significantly
higher? Would vendors and others who
receive feeds from the Consolidated
Tape bear significant implementation or
ongoing costs? Responses based on the
costs of implementing Regulation SHO
Rule 201,40 Regulation NMS,41 and
Form SH 42 are particularly requested.
Q20. What would be the benefits and
costs (including the direct, quantifiable
costs) of conducting a pilot for the
Consolidated Tape marking? Would a
pilot for Consolidated Tape marking be
feasible? Would the direct, quantifiable
costs of implementing and maintaining
a pilot be any less, or more, than those
of implementing and maintaining
Consolidated Tape marking on all listed
issuers? Would market participants be
likely to behave differently during a
pilot, for example by hesitating to
develop new trading strategies? 43
Q21. What would be the benefits and
costs of the voluntary component of the
pilot? What types of issuers would
likely volunteer to participate in a pilot?
How would this self-selection affect the
usefulness of any data derived from a
pilot? Are there other consequences
from a voluntary pilot? To maximize the
utility of any pilot, should the pilot be
designed to limit participation in a way
that facilitates comparisons of trading in
pilot companies and trading in nonpilot companies? If participation should
be limited, how should the Commission
determine which volunteers to include
or exclude from the pilot?
40 17
CFR 242.201.
CFR 242.600 et seq.
42 See supra note 33.
43 For example, in 2004, the Commission adopted
Rule 202T, which provided for the temporary
suspension of the short sale uptick rule in certain
securities so that the Commission could study
trading behavior in the absence of a price test. See
Exchange Act Release No. 50103 (July 28, 2004), 69
FR 48008 (Aug. 6, 2004). In the view of Division
Staff, Boehmer, Jones, and Zhang provide evidence
suggesting that trading behavior may not have
completely adjusted to the Regulation SHO Pilot.
See Boehmer, Jones, and Zhang, ‘‘Unshackling Short
Sellers: The Repeal of the Uptick Rule’’ (2008),
available at https://www.gsb.columbia.edu/mygsb/
faculty/research/pubfiles/3231/
UptickRepealDec11.pdf.
41 17
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26791
Q22. How should experiences with
transaction marking regimes in foreign
jurisdictions 44 inform analysis of the
feasibility, benefits, and costs? Are there
any analyses of transaction marking
regimes that are relevant to the
Division’s study?
Q23. To what extent would
Consolidated Tape marks be a substitute
or compliment to real time short
position reporting? How would the
benefits and costs of any Consolidated
Tape marks be impacted if real time
position reporting existed and vice
versa?
Dated: May 3, 2011.
By the Commission.
Elizabeth M. Murphy,
Secretary.
[FR Doc. 2011–11188 Filed 5–6–11; 8:45 am]
BILLING CODE 8011–01–P
DEPARTMENT OF STATE
[Public Notice 7108]
Advisory Committee for the Study of
Eastern Europe and the Independent
States of the Former Soviet Union;
Notice of Committee Renewal
Renewal of Advisory Committee. The
Department of State has renewed the
Charter of the Advisory Committee for
the Study of Eastern Europe and the
Independent States of the Former Soviet
Union. This advisory committee makes
recommendations to the Secretary of
State on funding for applications
submitted for the Research and Training
Program on Eastern Europe and the
Independent States of the Former Soviet
Union (Title VIII). These applications
are submitted in response to an annual
open competition among U.S. national
organizations with interest and
expertise administering research and
training programs in the Russian,
Eurasian, and Central and East
European fields. The program seeks to
build and sustain U.S. expertise on
these regions through support for
advanced graduate training, language
training, and postdoctoral research.
The committee includes
representatives of the Secretaries of
Defense and Education, the Librarian of
44 Several foreign jurisdictions have short sale
marking requirements in place including Australia
(Australian Securities and Investment Commission,
Regulatory Guide, RG 196.12 (April 2010)), Canada
(Universal Market Integrity Rules, Rule 3.2), Hong
Kong (Hong Kong Exchange Rules, Eleventh
Schedule, Rule 5), and Japan (Japan Financial
Services Agency, ‘‘FSA Extends Temporary
Measures Regarding Restrictions on Short Selling
and Purchases of Own Stocks by Listed Companies’’
(Jan. 21, 2011) (effective until Apr. 30, 2011)).
E:\FR\FM\09MYN1.SGM
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]]>Agencies
[Federal Register Volume 76, Number 89 (Monday, May 9, 2011)]
[Notices]
[Pages 26787-26791]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2011-11188]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-64383; File No. 4-627]
Short Sale Reporting Study Required by Dodd-Frank Act Section
417(a)(2)
AGENCY: Securities and Exchange Commission.
ACTION: Request for comment.
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SUMMARY: The Securities and Exchange Commission (``Commission''), on
behalf of its Division of Risk, Strategy, and Financial Innovation
(``Division''), is requesting public comment with regard to studies
required by the Dodd-Frank Wall Street Reform and Consumer Protection
Act of the feasibility, benefits, and costs of requiring reporting in
real time, either publicly or, in the alternative, only to the
Commission and the Financial Industry Regulatory Authority (``FINRA''),
of short sale positions of publicly listed securities, and of
conducting a voluntary pilot program in which public companies would
agree to have all trades of their shares marked ``long,'' ``short,''
``market maker short,'' ``buy,'' or ``buy-to-cover,'' and reported as
such in real time through the Consolidated Tape.
DATES: Comments should be received on or before June 23, 2011.
ADDRESSES: Comments may be submitted by any of the following methods:
Electronic Comments
Use the Commission's Internet comment form (https://www.sec.gov/rules/other.shtml); or
Send an e-mail to rule-comments@sec.gov. Please include
File Number 4-627 on the subject line.
Paper Comments
Send paper comments in triplicate to Elizabeth M. Murphy,
Secretary, U.S. Securities and Exchange Commission, 100 F Street, NE.,
Washington, DC 20549-1090.
All submissions should refer to File Number 4-627. To help us process
and review your comments more efficiently, please use only one method.
The Commission will post all comments on the Commission's Internet Web
site (https://www.sec.gov). Comments will also be available for Web site
viewing and printing in the Commission's Public Reference Room, 100 F
Street, NE., Washington, DC 20549, on official business days between
the hours of 10 a.m. and 3 p.m. All comments received will be posted
without change; we do not edit personal identifying information from
submissions. You should submit only information that you wish to make
available publicly.
FOR FURTHER INFORMATION CONTACT: Amy Edwards, Assistant Director, Bruce
Kraus, Co-Chief Counsel, Lillian Hagen, Special Counsel, Sandra Mortal,
Financial Economist, Division of Risk, Strategy, and Financial
Innovation, at (202) 551-6655, Securities and Exchange Commission, 100
F Street, NE., Washington, DC 20549-4977.
Discussion:
Under Section 417(a)(2) of the Dodd-Frank Wall Street Reform and
Consumer Protection Act (the Dodd-Frank Act),\1\ the Commission's
Division of Risk, Strategy, and Financial Innovation is required to
conduct studies of the feasibility, benefits, and costs of (A)
requiring reporting in real time, publicly or, in the alternative, only
to the Commission and the Financial Industry Regulatory Authority,
short sale positions in publicly listed securities, and (B) conducting
a voluntary pilot program in which public companies could agree to have
sales of their shares marked ``long,'' ``short,'' or ``market maker
short,'' and purchases of their shares marked ``buy'' or ``buy-to-
cover,'' and reported as such in real time through the Consolidated
Tape.\2\
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\1\ Public Law 111-203 (July 21, 2010).
\2\ The term ``Consolidated Tape,'' as used throughout this
release, refers to the current reporting systems for transactions in
all exchange-listed stocks and ETFs. These systems include Tapes A
and B of the Consolidated Tape Plan and Tape C of the Unlisted
Trading Privileges or ``UTP'' Plan. Trades in New York Stock
Exchange (``NYSE'')-listed securities are reported to Tape A; trades
in NYSE-Amex, NYSE-Arca, and regional exchange-listed securities are
reported to Tape B; and trades in NASDAQ-listed securities are
reported to Tape C. Transactions in unlisted equities, options, or
non-equity securities are not currently reported to the Consolidated
Tape. For more information see https://www.nyxdata.com/cta and https://www.utpplan.com/.
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In the Division's estimation, data made public by certain self-
regulatory organizations (``SROs'') indicate that orders marked
``short'' under current regulations account for nearly 50% of listed
equity share volume.\3\ Short
[[Page 26788]]
selling involves a sale of a security that the seller does not own or a
sale that is consummated by the delivery of a security borrowed by, or
for the account of, the seller.\4\ Typically, the short seller later
closes out the position by purchasing equivalent securities on the open
market and returning the security to the lender.\5\ In general, short
selling is used to profit from an expected downward price movement, to
provide liquidity in response to unanticipated demand, or to hedge the
risk of an economic long position in the same security or in a related
security.\6\
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\3\ This estimate was made by the Division based on short
selling volume data for June 2010 made available by SROs. This
estimate is consistent with estimates for prior months, and the
short percentage varied little from day to day. The underlying data
can be found at hyperlinks available at https://www.sec.gov/answers/shortsalevolume.htm, and have been provided since August 2009 by the
SROs listed therein. As indicated on these hyperlinks, ``short
selling volume'' is the volume of executed orders marked ``short''
or ``short exempt'' pursuant to Rule 200(g) of Regulation SHO (which
requires broker-dealers to mark all equity sell orders as either
``long,'' ``short,'' or ``short-exempt''). See 17 CFR 242.200(g).
Under current rules, these order marks are not submitted to or
reported on the Consolidated Tape, but are maintained as part of
broker-dealers' books and records pursuant to Rules 17a-3 and 17a-4.
See 17 CFR 240.17a-3(a)(5)-(7) and 240.17a-4(b)(8).
\4\ See 17 CFR 242.200(a).
\5\ See Exchange Act Release No. 50103 (July 28, 2004), 69 FR
48008 (Aug. 6, 2004) (``Regulation SHO Adopting Release''),
available at https://www.sec.gov/rules/final/34-50103.htm.
\6\ See, e.g., id.
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To better inform the study required by Section 417(a)(2) of the
Dodd-Frank Act, the Commission, on behalf of the Division, seeks
comment on both the existing uses of short selling in securities
markets and the adequacy or inadequacy of currently available
information regarding short sales, as well as comment on the likely
effect of these possible future reporting regimes on the securities
markets, including their feasibility, benefits, and costs.
The Commission is required to submit a report on the results of
these studies to Congress no later than July 21, 2011. All interested
parties are invited to submit their views, in writing. Empirical
evidence relevant to any part of the Division's study is expressly
requested.
I. Baseline
Certain information regarding short sales is currently available to
the public. This information includes the total ``short interest'' in
each listed security (i.e., total shares in short positions in that
security in all customer and proprietary firm accounts of FINRA member
firms), which has been reported twice each month since 2007,\7\ as well
as data made available more recently on the short selling volume for
each listed equity security that is reported on a daily basis,\8\ and
trade-by-trade short sale transaction data that is released on a
delayed (no more than 30 days after the end of the month) basis.\9\
Additionally, certain data vendors offer stock lending data, including
stock loan volume, lending costs, and the percentage of available stock
out on loan, which some market commentators have used as measures of
short selling.\10\ Further, Section 929X(a) of the Dodd-Frank Act
amended Section 13(f) of the Securities Exchange Act of 1934
(``Exchange Act'') to require the Commission to adopt rules requiring
monthly (or potentially more frequent) public short sale disclosures by
security, including the ``aggregate amount of the number of short sales
of each security, and any additional information determined by the
Commission.'' \11\
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\7\ See FINRA Rule 4560. FINRA member firms must report total
shares in short positions in all of their customer and proprietary
firm accounts in all equity securities twice per month through
FINRA's Web-based Regulation Filing Application (``RFA'') system.
The short interest data in listed stocks is released by exchanges
that list those stocks. Further, FINRA releases the short interest
data in unlisted stocks.
\8\ See supra note 3 for more information on this data and how
to obtain it.
\9\ These data sets include one observation for each execution
involving a short sale and typically date from August 2009. These
data sets can be found at hyperlinks available at https://www.sec.gov/answers/shortsalevolume.htm.
\10\ Data Explorers and SunGard, for example, provide data on
securities lending to clients. As some commentators have noted,
stock lending facilitates short selling (see, e.g., Speech by
Chester Spatt, available at https://www.sec.gov/news/speech/2007/spch042007css.htm). As noted above, a number of data vendors sell
information as to shares that have been loaned to other investors.
Among other things, this information may include volume of loans,
lending costs, and the percentage of available stock out on loan.
This data offers indirect evidence of short selling, and some
research has used stock lending data as a proxy for actual short
sales. See, e.g., Oliver Wyman, ``The effects of short selling
public disclosure of individual positions on equity markets'' (Feb.
2011), available at https://www.oliverwyman.com/ow/pdf_files/OW_EN_FS_Publ_2011_Short_Selling_Public_Disclosure_Equity_Markets.pdf.
\11\ See Exchange Act Section 13(f)(2), as amended.
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Q1. How are currently available data used by issuers, market
participants, and others (such as SROs, data vendors, media, analysts,
and academics) today? How widely distributed are currently available
data? Do costs or other factors limit access to currently available
data? Are there other important sources of information as to short
sales and short sale positions in addition to those mentioned above?
Q2. The Division understands that equity market makers rely on
short selling to facilitate customer buy orders and to ensure that they
can maintain two-sided markets without carrying large risky positions.
The Division also understands that option market makers frequently sell
short to hedge positions taken in the course of market making
activities.\12\ Why else might market makers sell short? How much of
all short selling is accounted for by bona fide market making? Do
market makers sell short for purposes other than bona fide market
making? \13\ Are there ways in which short sales by market makers and
other market participants performing similar roles or functions (but
that are not subject to some or all of the requirements applicable to
market makers) could be viewed as problematic?
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\12\ See, e.g., Exchange Act Release No. 58775 (Oct. 14, 2008),
73 FR 61690 (Oct. 17, 2008).
\13\ In adopting Regulation SHO, the Commission discussed
several activities that are not bona fide market making.
Specifically, the Commission stated bona fide market making: (1)
``does not include activity that is related to speculative selling
strategies or investment purposes of the broker-dealer and is
disproportionate to the usual market making patterns or practices of
the broker-dealer in that security''; (2) ``where a market maker
posts continually at or near the best offer, but does not also post
at or near the best bid, the market maker's activities would not
generally qualify as bona fide market making for purposes of the
exception''; and (3) ``does not include transactions whereby a
market maker enters into an arrangement with another broker-dealer
or customer in an attempt to use the market maker's exception for
the purpose of avoiding compliance with Rule 203(b)(1) by the other
broker-dealer or customer.'' Exchange Act Release No. 50103, 69 FR
48008, 48015 (Aug. 6, 2004) (citations omitted).
---------------------------------------------------------------------------
Q3. The Commission requests comment on the ways and the extent to
which, if any, commenters believe that short selling has been
associated with abusive market practices, such as ``bear raids'' where
an equity security is sold short in an effort to drive down the
security's price by creating an imbalance of sell-side interest? \14\
In addition, the Commission requests comment on the ways and extent to
which, if any, commenters believe trade-based manipulation (i.e.,
manipulating without a corporate action or spreading false information)
\15\ using short sales is possible? Would greater transparency of short
positions or short sale transactions help to better deter or prevent
such abuses, or assist in additional appropriate actions to prevent
them? If so, what new disclosures should be required?
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\14\ See, e.g., Exchange Act Release No. 61595 (Feb. 26, 2010),
75 FR 11232, 11235 (Mar. 10, 2010).
\15\ For a discussion of the theory regarding trade based
manipulation, See Allen, F. and D. Gale, ``Stock Price
Manipulation,'' (1992) Review of Financial Studies, 5(3), 503-529.
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II. Position Reporting
Section 417(a)(2)(A) of the Dodd-Frank Act requires the Division to
conduct a study of short ``position''
[[Page 26789]]
reporting; the term ``position'' is not defined in the Exchange Act or
in Section 417 of the Dodd-Frank Act. For purposes of this study, the
Division plans to use ``position'' to refer to outstanding holdings at
a point in time. Further, Section 417 of the Dodd-Frank Act does not
specify a particular level of aggregation and netting, address whose
positions would be reported, or indicate whether derivatives or other
ways to obtain economic exposure to a stock are covered and existing
U.S. regulatory definitions vary in this dimension.\16\ ``Economic
exposure'' as used by the Division in this request for comment refers
to any financial interest in a company, however acquired. For example,
an investor may have economic exposure to a company by owning the stock
itself, or through ownership of an index or of derivatives. Likewise,
the short sale position reporting requirements in foreign
jurisdictions, implemented or proposed, differ from one another in a
number of areas with respect to the definition of ``position,''
including inclusion or exclusion of derivatives in the short interest
calculation, and reporting of net or gross position. For example, the
short interest calculation in Australia \17\ and Hong Kong \18\ does
not or would not include derivatives, whereas the U.K. \19\ and a
proposal by the European Union (the ``E.U. Proposal'') \20\ both
include or would include them. In Australia,\21\ the E.U. Proposal,\22\
and the U.K.,\23\ the reportable position is or would be the net short
position, while in Hong Kong, long interest and short positions are
calculated separately and are not netted.\24\
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\16\ FINRA defines a short position as resulting from ``short
sales'' as that term is defined in Rule 200(a) of Regulation SHO,
but captures the position as of a settlement date as opposed to a
trading date. See FINRA Rule 4560. The Commission defined a short
selling position in former Rule 10a3-T as ``the aggregate gross
short sales of an issuer's Section 13(f) securities (excluding
options), less purchases to close out a short sale in the same
issuer,'' and stated that ``the Form SH short position is not net of
long position.'' See Exchange Act Release No. 58785 (Oct. 15, 2008),
73 FR 61678 (Oct. 17, 2008). The reporting requirements of Form SH
were in effect from September 22, 2008 to August 1, 2009.
\17\ See Corporations Regulations 2001 (Commonwealth),
regulation 7.9.99(2) (Australia), indicating that the short interest
calculation includes securities, managed investment products, and
sovereign debentures, stocks or bonds.
\18\ See Hong Kong Securities and Futures Commission,
Consultation Conclusions on Increasing Short Position Transparency
(Mar. 2, 2010), available at https://www.sfc.hk/sfc/doc/EN/speeches/consult/consultationconclusion2march2010english.pdf.
\19\ Short Selling Rules, 2010, FINMAR 2010 (U.K.), ] 2.3.6.
\20\ The Committee for European Securities Regulators (``CESR'')
proposed to require that positions be netted at the legal entity
level and include all financial instruments that create economic
exposure to an issue. See CESR, Model for a Pan-European Short
Selling Disclosure Regime, CESR/10-088 (Mar. 2010) (``E.U. Model''),
at 9.
\21\ See Corporations Regulations 2001 regulation 7.9.99
(Australia), which states that ``a short position is short sales net
of long positions.''
\22\ E.U. Model, at 9.
\23\ FINMAR (U.K.), at ] 2.3.2.
\24\ See Hong Kong Securities and Futures Commission,
Consultation Conclusions on Increasing Short Position Transparency
(Mar. 2, 2010), available at https://www.sfc.hk/sfc/doc/EN/speeches/consult/consultationconclusion2march2010english.pdf.
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Q4. Would real time reporting of the short positions of all
investors, intermediaries, and market participants be feasible, and if
so, in what ways would it be beneficial? What problems would it
address? What would be any reasons, in terms of benefits and costs, for
treating short sale position reporting differently than long position
reporting? Would ``real time'' reporting be necessary to achieve these
benefits, or is ``prompt'' updating for material changes in the short
position (such as Schedule 13D updating requirements) sufficient? \25\
If real time reporting would be beneficial, should ``real time'' be
defined as ``continuously updated as soon as practicable,'' or as
frequent ``snapshots'' of short positions throughout the trading day?
Should ``as soon as practicable'' be defined and, if so, how? If
frequent short sale position reporting of some kind would be
beneficial, how frequently should such reports be made in order to
realize those benefits? Would real time data be more or less accurate
than data reported on a delay? Please explain why or why not.
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\25\ Exchange Act Rule 13d-2 requires that if there is any
material change in the facts set forth in a Schedule 13D, including,
but not limited to, any material increase or decrease in the
percentage of the class beneficially owned, the person required to
file the statement must promptly file an amendment disclosing the
change. See 17 CFR 240.13d-2.
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Q5. Who would be likely to use real time short position data, and
how? Would the short sale position data be too voluminous to be used
directly by investors? Could such data help to detect more easily,
better deter, or better prevent short selling abuses? Would market
commentators and others use real time short position data to help the
public better understand the U.S. securities markets? Would users of
real time short position data be able to derive reasonably clear
interpretations of the data in real time, and, to the extent they could
not, how would the costs and benefits of any reporting regime be
affected? Would real time data on short positions help or hinder long-
term investors in making ``efficient investments?''\26\
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\26\ See, e.g., Biagio Bossone, Sandeep Mahajan, and Farah
Zahir, Financial Infrastructure, Group Interests, and Capital
Formation (International Monetary Fund, Working Paper 03/24, 2003),
available at https://www.imf.org/external/pubs/ft/wp/2003/wp0324.pdf.
Efficient investments optimize an investor's utility when trading
off expected return and risk. If investors can more accurately
estimate expected returns and risk, then they are better able to
make efficient investments. For a summary of the underlying theory,
see Bodie, Kane, and Marcus Investments, 7th ed. Chapters 8, 11, and
12.
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Q6. How would real time data on short positions affect the behavior
of short sellers and other investors? Would it affect abusive short
selling, in particular? To what extent, if any, would such data deter
non-abusive short selling? For example, would such data reveal the
trading strategies of non-abusive short sellers? Could the availability
of such data create new opportunities for unfair or otherwise abusive
market practices, such as bear raids or short squeezes? Could real time
data on short positions lead to copycat trading? \27\ How would real
time data on short positions affect investor confidence?
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\27\ Copycat trading is a form of ``herd behavior,'' which has
been described as ``[t]he tendency of investors, like herd animals,
to follow the group. Such conformity can give rise to bubbles in
individual securities and market sectors.'' Library of Congress,
Federal Research Division, Annotated Bibliography on the Behavioral
Characteristics of U.S. Investors (Aug. 2010), available at https://www.loc.gov/rr/frd/pdf-files/SEC_Annotated-Bibliography.pdf.
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Q7. How would real time data on short positions affect liquidity,
volatility, price efficiency, competition, and capital formation? Would
real time short position reporting affect equity-related securities
markets, such as option or other derivative markets, convertible bond
or other debt markets? If so, in what ways?
Q8. How should ``position'' be defined to help ensure any short
sale position reports would be useful in detecting and deterring
abusive short sale practices? Should ``position'' be defined
differently to accomplish another purpose? If so, how, and what purpose
would such a definition help accomplish? Would there be a trade-off
between minimizing incremental implementation costs, above the cost of
existing short reporting systems and procedures, in the context of a
short position reporting regime and its utility? For maximum utility,
should short positions be reported gross, or net of long positions, or
in both ways? Should short positions include derivatives and index
components? Should short positions be the net economic exposure to a
stock across all instruments? Should short positions be defined as in
former Rule 10a3-T, in which ``the Form SH short position is
[[Page 26790]]
not net of long position?'' \28\ In the case of broker-dealers, should
position reporting be based on existing Regulation SHO aggregation
units within broker-dealers,\29\ for the broker-dealer taken as a
whole, or for its holding company? Please describe the feasibility of
any incremental changes to the existing short sale reporting systems
that would be necessary to report short sale ``positions.'' Would any
potential definitions of short positions be infeasible in real time?
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\28\ See supra note 16.
\29\ Rule 200(f) of Regulation SHO permits a broker-dealer,
under certain conditions, to calculate its long or short position by
independent trading-unit, rather than on a firm-wide basis. 17 CFR
242.200(f).
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Q9. What would be the benefits and costs of short position
reporting if ``position'' was defined to mean short interest,\30\ which
would be the aggregate number of shares short in each stock? Would real
time public reporting of aggregate short interest be feasible? If so,
what problems would it address, and how (and by whom) would this data
be used? Should the position reporting to be examined in the Division's
study be more comprehensive than the current bi-monthly short interest
reporting? For example, ``arranged financing'' (which would include
borrowing from a foreign bank or affiliate to cover short positions) is
not currently included in short interest. What would be the impact of
including arranged financing in a definition of short position?
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\30\ See supra note 7.
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Q10. What would be the feasibility, benefits, and costs of real
time short position reporting to regulators only, and not to the
public? What would the benefits and costs be if this real time
reporting information were to be made public on a delayed basis? What
length of delay might best balance any benefits and costs?
Q11. Who would be in a position to report short positions in real
time? Would broker-dealers be able to accurately report customer short
positions in real time? Would anyone else be better suited? Would short
sellers themselves be equipped to report their own short positions in
real time? Would anyone but the short seller be in a position to report
the short seller's short position, whether or not the short position
was defined as the short seller's economic position including
derivatives? What would be the feasibility of adapting the technology
infrastructure that supports existing reporting requirements to support
real time short position reporting?
Q12. Who would be in a position to collect and disseminate short
positions in real time? Would it be feasible for listing exchanges to
collect and disseminate this information? Would a consolidator be
better suited to collect this information? What would be the
feasibility of adapting the technology infrastructure supporting
existing reporting requirements to support real time short position
collection and dissemination? Would short position data developed from
existing systems be less meaningful than data from a new system
designed for this purpose? Why or why not?
Q13. What would be the direct, quantifiable costs of short position
reporting for those compiling, reporting, collecting, or disseminating
the data? Please differentiate implementation costs from ongoing costs
and include opportunity costs. How feasible would it be for brokers,
exchanges, and others to create or modify a reporting and dissemination
system? What would be the particular technological challenges faced in
creating or modifying a reporting and dissemination system? Responses
based on the costs of implementing the 2007 modifications to short
interest reporting \31\ or the 2008 implementation of Form SH \32\ are
particularly requested.
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\31\ See supra note 7.
\32\ This requirement was instituted via three emergency orders
(dated Sep. 18, 2008, Sep. 21, 2008, and Oct. 2, 2008), which
implemented Exchange Act Rule 10a-3T (See Exchange Act Release No.
58785 (Oct. 15, 2008), 73 FR 61678 (Oct. 17, 2008)). Comments are
available at https://www.sec.gov/comments/s7-31-08/s73108.shtml.
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Q14. How would the establishment of a significant reporting
threshold, which would limit short position reporting requirements to
holders of significant net short positions, affect costs and the
utility of the short position information? If reporting thresholds
would be useful, would thresholds at the 5% level used under Section
13(g) of the Exchange Act or the 0.25% level used in former Form SH
\33\ be appropriate, or would a lower threshold, such as that used in
the U.K. model, be preferable? \34\ Or would a higher threshold be
appropriate? Please explain why or why not. Would thresholds (computed
on a net basis) at U.K. levels (or the lower levels being contemplated
by the E.U.) \35\ capture ordinary course, bona fide market maker
positions, or would they tend generally to capture only the positions
of investors taking a view as to the stock's future price direction?
Would a general exemption from position reporting (or public position
reporting) for market makers be appropriate? Why or why not?
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\33\ Certain institutional investment managers were required to
report short sales of certain securities on former Form SH unless
the short position constituted less than 0.25% of the class of
shares and had a fair market value of less than $10,000,000. See
Exchange Act Release No. 58785 (Oct. 15, 2008), 73 FR 61678 (Oct.
17, 2008).
\34\ Two types of short positions must be publicly disclosed in
the U.K. A net short position of 0.25% and above of issued capital
in a U.K. company involved in a rights issue must be disclosed. In
addition, a net short position in a U.K. financial sector company
must be disclosed initially when such interest exceeds 0.25% of
total share capital, and on an ongoing basis when the position
exceeds or falls below 0.25%, 0.35%, 0.45% and 0.55% and each 0.1%
threshold thereafter. See FINMAR Sec. Sec. 2.2.1, 2.1.2. See also
U.K. Financial Services Authority, ``Implementing Aspects of the
Financial Services Act 2010'' (2010), at 2.13.
\35\ The E.U. Model would require reporting to regulators when
short interest exceeds 0.2% of issued share capital, and reporting
to the public when it exceeds 0.5% of issued share capital. See E.U.
Model, at 8-9.
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Q15. How should experiences with short sale position reporting
regimes in foreign jurisdictions \36\ inform the analysis of
feasibility, benefits, and costs? How relevant are any analyses of
other reporting regimes to the Division's study? \37\ The Commission
requests information on any relevant studies not cited in this request
for comment.
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\36\ See supra notes 17-24, 34, and 35 for examples.
\37\ See Oliver Wyman Report, supra note 10, and also U.K.
Financial Services Authority, Short selling: Feedback on DP09/1, 09/
4 (Oct. 2009), available at https://www.fsa.gov.uk/pubs/discussion/fs09_04.pdf; European Commission, Impact Assessment on the Proposal
for a Regulation of the European Parliament and of the Council on
Short Selling and Certain Aspects of Credit Default Swaps, SEC(2010)
1055 (Sep. 15, 2010), available at https://ec.europa.eu/internal_market/securities/docs/short_selling/20100915_impact_assessment_en.pdf.
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III. Transaction Reporting
The Commission requests comment, on behalf of the Division, on the
feasibility, benefits, and costs of the Consolidated Tape collecting
and disseminating certain transaction marks. Specifically, Section
417(a)(2)(B) of the Dodd-Frank Act requires the Division to study the
feasibility, benefits, and costs of conducting a voluntary pilot
program in which public companies would agree to have all trades of
their shares marked ``long,'' ``short,'' and/or ``market maker short''
(for the sell portion(s) of the trade), and ``buy'' and/or ``buy to
cover'' (for the buy portion(s) of the trade) and reported in real time
through the Consolidated Tape.
Q16. What benefits, costs, or unintended consequences would flow
from adding these transaction marks to the Consolidated Tape? Who would
use these marks, and how? Would data from the Consolidated Tape be
accessible to the market participants who are most interested in short
selling information? Would the Consolidated Tape data be too voluminous
to be used directly by
[[Page 26791]]
interested market participants? How would the Consolidated Tape marks
affect the behavior of short sellers and other investors? Would
Consolidated Tape marks help or hinder long-term investors in making
``efficient investments?'' \38\ Would market commentators and others
use Consolidated Tape marks to help the public better understand
markets? Could such marks help to better detect, deter, or prevent
identified short selling abuses? Alternatively, could such marks
themselves present opportunities for alleged unfair or otherwise
abusive market practices, such as bear raids or short squeezes? Would
real time Consolidated Tape marks lead to copycat trading? How would
Consolidated Tape marks affect investor confidence?
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\38\ See supra note 26.
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Q17. Please discuss the feasibility, benefits, and costs related to
the ``short sale,'' ``market maker short,'' and ``buy-to-cover'' marks
specifically, and the effects of any choices that would be made when
defining such terms. Would there be a trade-off between defining the
trades that would be subject to these marks for maximum utility and
accuracy to investors, and minimizing implementation costs by building
on existing definitions and order marking infrastructure? \39\ If so,
how should the tension between these goals be best resolved? Would
there be any other potential issues associated with the accuracy or
clarity of Consolidated Tape marks? Would the Consolidated Tape marks
present possibilities for misinterpretation of the data that could
impact any benefits and costs?
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\39\ See supra note 3.
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Q18. How would any additions to Consolidated Tape marks affect
liquidity, volatility, price efficiency, competition, and capital
formation? To what extent, if any, would such data deter short selling
activity not associated with abusive market practices, but that
enhances market quality, for example, by revealing trading strategies?
What are the consequences of such deterrence? Would any additions to
Consolidated Tape marks have consequences (including benefits or costs)
for equity-related securities markets, such as options or other
derivative markets, convertible bond or other debt markets? If so,
please explain. What would the feasibility, benefits, and costs be if
this real time reporting information were to be made public on a
delayed basis? What length of delay might best balance any benefits and
costs?
Q19. What would be the direct, quantifiable costs of adding the
additional fields to the Consolidated Tape to support new marks? Please
differentiate implementation costs from ongoing costs and include
opportunity costs. How feasible would it be for brokers, exchanges, and
others to modify order management systems, or other systems, for these
marks? What would be the potential technological challenges faced in
implementing these marks? Would the Consolidated Tape bear significant
implementation or ongoing costs? For example, would capacity
requirements be significantly higher? Would vendors and others who
receive feeds from the Consolidated Tape bear significant
implementation or ongoing costs? Responses based on the costs of
implementing Regulation SHO Rule 201,\40\ Regulation NMS,\41\ and Form
SH \42\ are particularly requested.
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\40\ 17 CFR 242.201.
\41\ 17 CFR 242.600 et seq.
\42\ See supra note 33.
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Q20. What would be the benefits and costs (including the direct,
quantifiable costs) of conducting a pilot for the Consolidated Tape
marking? Would a pilot for Consolidated Tape marking be feasible? Would
the direct, quantifiable costs of implementing and maintaining a pilot
be any less, or more, than those of implementing and maintaining
Consolidated Tape marking on all listed issuers? Would market
participants be likely to behave differently during a pilot, for
example by hesitating to develop new trading strategies? \43\
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\43\ For example, in 2004, the Commission adopted Rule 202T,
which provided for the temporary suspension of the short sale uptick
rule in certain securities so that the Commission could study
trading behavior in the absence of a price test. See Exchange Act
Release No. 50103 (July 28, 2004), 69 FR 48008 (Aug. 6, 2004). In
the view of Division Staff, Boehmer, Jones, and Zhang provide
evidence suggesting that trading behavior may not have completely
adjusted to the Regulation SHO Pilot. See Boehmer, Jones, and Zhang,
``Unshackling Short Sellers: The Repeal of the Uptick Rule'' (2008),
available at https://www.gsb.columbia.edu/mygsb/faculty/research/pubfiles/3231/UptickRepealDec11.pdf.
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Q21. What would be the benefits and costs of the voluntary
component of the pilot? What types of issuers would likely volunteer to
participate in a pilot? How would this self-selection affect the
usefulness of any data derived from a pilot? Are there other
consequences from a voluntary pilot? To maximize the utility of any
pilot, should the pilot be designed to limit participation in a way
that facilitates comparisons of trading in pilot companies and trading
in non-pilot companies? If participation should be limited, how should
the Commission determine which volunteers to include or exclude from
the pilot?
Q22. How should experiences with transaction marking regimes in
foreign jurisdictions \44\ inform analysis of the feasibility,
benefits, and costs? Are there any analyses of transaction marking
regimes that are relevant to the Division's study?
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\44\ Several foreign jurisdictions have short sale marking
requirements in place including Australia (Australian Securities and
Investment Commission, Regulatory Guide, RG 196.12 (April 2010)),
Canada (Universal Market Integrity Rules, Rule 3.2), Hong Kong (Hong
Kong Exchange Rules, Eleventh Schedule, Rule 5), and Japan (Japan
Financial Services Agency, ``FSA Extends Temporary Measures
Regarding Restrictions on Short Selling and Purchases of Own Stocks
by Listed Companies'' (Jan. 21, 2011) (effective until Apr. 30,
2011)).
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Q23. To what extent would Consolidated Tape marks be a substitute
or compliment to real time short position reporting? How would the
benefits and costs of any Consolidated Tape marks be impacted if real
time position reporting existed and vice versa?
Dated: May 3, 2011.
By the Commission.
Elizabeth M. Murphy,
Secretary.
[FR Doc. 2011-11188 Filed 5-6-11; 8:45 am]
BILLING CODE 8011-01-P
