Stock Analyst Information Series
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VI. Transparency and Reporting
As argued above, a strong case can be made in favor of allowing short selling and against the imposition of various restrictions on this activity. These arguments presume that information is available to market participants in a timely manner. Thus, transparency in the form of timely reporting is a precondition for efficient financial markets. In most markets, such information is not always available to prevent potential, albeit rare, abuses which some believe are prevalent in the market. We propose that daily short selling trading activity, and not just short interest reported with a lag, on all listed stocks be transmitted online to the exchange/the clearing corporation. Every short sale that appears on the sales and trade ticker should be marked as such. (Of course, the identity of the seller would not be public information.) This change in reporting requirements will also provide us with timely short selling trading activity and short interest information. It will also make it easier for the exchange/clearing to check if the stock was borrowed and is being delivered. This should not be burdensome, as the FINRA has put in place a system for collecting similar information from the over-the-counter corporate bond market, known as the Trade Reporting and Compliance Engine (TRACE). TRACE has contributed to the efficiency and liquidity of the corporate bond market and a similar effort in the stock market with regard to short selling should have a salutary effect on market liquidity and efficiency.
Short selling is an important activity in a well functioning financial market. Its contribution to price discovery, lower volatility and liquidity improve the fairness and efficiency of markets. A short sale should be considered on a par with a sale by existing shareholders and hence, treated the same as buying activity, its symmetrical counterpart. It goes without saying that regulators should be extremely concerned with market manipulation that may be perpetrated by buyers or sellers, including short sellers, and take appropriate and timely action to curb such practice. Regulators should also strictly enforce the requirement that stocks should be borrowed prior to a short sale by any investor who is not a market maker. In the interest of transparency and consistency, the regulators at the SEC, FINRA and the exchanges, and their counterparts in other countries should require timely reports on short selling activity, in line with the existing reporting requirements placed on buyers and sellers.
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