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Date: 2021-06-08 18:00:00
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As the craze in meme stock trading rolls on, the Financial Industry Regulatory Authority has proposed changes to its short-sales reporting requirements to provide investors with what the self-regulator says will be more timely information on short positions.
The move highlights regulators’ and lawmakers’ intensifying scrutiny of short-selling amid ongoing market swings in so-called meme stocks (so dubbed because they are turned into memes that are easy to share on Reddit and other social media platforms). So-called sophisticated investors, such as hedge funds, have traditionally used short selling to bet against a stock they believe will drop in price. Speculative retail investors have started zeroing in on stocks that are shorted by hedge funds, and then bid them up to create a short squeeze that benefits the retail investors and hurts the short sellers.
One such meme stock, AMC Entertainment Holdings Inc., saw its share price jump another 17% on Monday. AMC soared from $8.65 to nearly $60 in the course of the past month thanks to speculative trading on zero-commission brokerage platforms like Robinhood.
Some pundits, including Charles Payne of Fox Business, have said the meme stock craze allows investors to take revenge against hedge funds, which he said have been “ruining companies” for years by shorting their shares.
Finra’s proposed changes to Rule 4560 would increase the frequency of short-interest reports from twice a month to weekly or even daily, giving investors an opportunity to see firms’ positions in a more timely fashion.
Finra also is considering reducing their processing time in disseminating short-interest data. Currently, Finra disseminates short-interest data for OTC equity securities on the Finra website seven business days after the designated settlement date, which is five business days after the reports are due from member firms. The proposed reduction in Finra processing time could apply where firms report short interest to Finra on a daily or weekly basis.
“Increasing the frequency and timing of reporting and disseminating short interest data would provide Finra, other regulators, investors and other market participants with a more current view of short interest information, better inform investors’ and other market participants’ investment decisions, and provide more timely information to Finra for regulatory use,” the organization said.
Current reporting requirements result “in a seven-business day delay before investors have access to the collected short interest data. Investors who wish to know the short interest as the percentage of shares outstanding or public float, both of which are commonly used metrics that can be compared across securities, must look up the denominator elsewhere,” Finra said.
Changes in short interest for OTC equity securities can be significant between settlement dates relative to the average daily trading volume in securities. For example, 8,017 OTC equity securities had changes in short interest between March 15, 2021 and March 31, 2021 settlement dates, Finra said.
“The magnitude of the change in short interest for OTC equity securities amounted to 28 percent of the average daily trading volume for the median security but rises to 424 percent by the 75th percentile and 62,869 percent by the 95th percentile,” Finra said.
The change would require clearing firms to report synthetic short exposure—bets made against shares using derivatives—in firm and customer accounts.
The changes would also require clearing firms to report to Finra certain information on the stock loans that facilitate short bets "for regulatory purposes, but with an eye toward eventual public dissemination," amid other changes, the regulator said.
The proposed changes, which are now open to public comment, would likely increase the burden on clearing firms and prime brokers who bear the primary responsibility for short interest reporting under the current requirements, Finra said.