The Securities and Exchange Commission is proposing a new set of reporting requirements for short-selling activity that it says will help regular people and market watchdogs better understand what’s going on in the stock market and how short sellers are affecting the prices of individual stocks.
The rules, if adopted, would require investment managers such as hedge funds to submit monthly reports about their short positions, which the regulators would then publish in aggregate, according to a proposal the S.E.C. announced on Friday. The thresholds for reporting would be based on the size of the investors’ short positions, not the size of the investment firms themselves.
“This would provide the public and market participants with more visibility into the behavior of large short sellers,” Gary Gensler, the S.E.C.’s chair, said in a statement emailed to journalists. Mr. Gensler said the new requirements would also be good for financial regulators because they “would help us to better oversee the markets and understand the role short selling may play in market events.”
To short a stock, a trader borrows shares from a broker for a fee and sells them immediately, expecting to buy them back when the share price falls, return them to the broker and pocket the difference. Short-selling is not illegal, and its supporters say it can even benefit the markets by weeding out underperforming companies. But it also has the potential to destabilize the market, as happened last year during the meme stock mania.
Regulators have been examining ways to keep short-selling activity from disrupting the stock market, motivated in large part by the events of January 2021, when retail investors ganged up on hedge funds that were shorting shares of GameStop, the video game retailer, and AMC Entertainment, a struggling movie theater chain, in what’s called a “short squeeze.”
For a brief period, there was chaos.
Individual investors bought up as many shares of those companies they could, causing their share prices to spike so sharply that trades in them began to fail at high rates. When stocks are so heavily shorted, it can happen that the same share of a company’s stock is lent to more than one person seeking to short it — and when it is time to buy back the stock at the end of the trade, there may not be enough shares to go around. That is what happened during the squeezes of AMC and GameStop.
Friday’s proposal is designed to make that less likely to happen again.
The S.E.C. wants any investment manager with short positions that are large enough to meet a certain threshold to file monthly reports about those positions and the daily trading activities that created them. Regulators intend to keep the identities of the reporting firms secret and publish the data in aggregate, giving the public an overall view of large short sellers’ moves each month.
The S.E.C. appears to be following in the footsteps of regulators in the European Commission, which has been more aggressive in requiring the disclosure of most short positions by traders and investors.
The proposal will not become a new rule until after a 60-day comment period, during which market participants and members of the public can offer suggestions about how the commission should revise it. The commission will then have to vote to adopt a final rule.
Matthew Goldstein contributed reporting.