The Securities and Exchange Commission is never in a hurry to do anything, especially not anything that might upset the gravy train for the hedge funds that run Wall Street.

Related to this, the New York Stock Exchange has been lobbying the SEC for years to require large investors to identify the stocks they are shorting. U.S. stock markets have very few rules requiring much disclosure about short positions (betting that a company’s shares will fall), unlike the the European Union and most of the rest of the globe, where funds are required to publish short positions when 0.5% of a firm’s share value.

 

Ireland-shortselling-data NYSE
Ireland shortselling data

The NYSE sent a letter to the SEC making its case again on October 7th, literally pleading for the SEC to “bring light to a less transparent and increasingly consequential corner of the securities market.”

The real question here, of course, is why the SEC has not done anything about the lack of transparency and unfairness in not having to report short positions when you must report long positions. The fact that the commission has not taken steps to fix this major unfair advantage for Wall Street is yet more clear cut evidence that the SEC is in a real sense “owned” by Wall Street.

NYSE wants SEC to require timely reporting of short positions

All the big funds pay their brokerage to provide them with up-to-date short-selling data, but everyone else has to wait two weeks for the NYSE and other stock exchanges to publish the official total of each firm’s shares are out on loan and it does not identify which firms are short which stocks. While the SEC requires hedge funds to report their long positions regularly, there are no rules in place regarding disclosure of specific short positions.

Financial industry regulators in Europe introduced a short position disclosure requirement on hedge funds as part of their response to the financial crisis. Hedge funds must report short positions of 0.2% or greater in European stocks to their national financial regulator. If/when the position hits 0.5%, they must then publicly announce the position. However, it should be noted that bar the UK and a few other nations, it is hard to find the EU short data, there are many exemptions and many countries have pages which are hard to navigate even for those fluent in let’s say Hungarian.

David Tawil, a founder of $80 million hedge fund Maglan Capital, notes that disclosing positions often leads to “copycat investing”.

“Being a fund manager and an investor, you don’t want to give away all of that information so readily because that’s what makes your investment fund unique,” Tawil explained. “If everyone knows what my positions are, then they can go ahead and essentially mimic them.” However, the same could be said regarding long positions where there in fact guru ETFs following what hedge funds are buying.

Currently in the U.S., hedge funds with over $100 million in assets must report their long holdings to the SEC within 45 days of the end of each calendar quarter. NYSE’s letter — written together with the National Investor Relations Institute — argued: “It is past time for the commission to require short-position reporting at least to the same extent of long-position reporting.”

Furthermore, the first meeting of a committee (composed of members of the NYSE) named the Listed Company Advisory Board discussed the lack of transparency on short positions in great detail, based on a letter that NYSE President Tom Farley sent to customers.

“There was a clear consensus among that group that more transparency would be helpful,” Farley wrote in the letter.

However, even for those who advocate more transparency it is unclear whether such a plan would be helpful. Besides the EU example, Japan requires reporting of short positions. However, most hedge funds use SWAPs with banks to hide when they are in fact shorting Japanese equities. This has lead many who track Japanese short positions to consider the data collected by regulators in Tokyo as worthless.