Across the globe, every country with a stock exchange has some form of major shareholding (US: beneficial ownership) disclosure regulation.
Simply put, if someone acquires over x% of a company incorporated or listed in a country, then the financial regulator of said country generally wants to know about it. The details can be very tricky - for example the x% can be as low as 1% in some countries and as high as 10% in others, some countries include derivatives in the calculation, others don’t and many, many more fine nuances.
Ensuring market transparency benefits all - shareholders, listed companies, financial institutions as well as the regulator. No-one should benefit from information asymmetry and a level playing field is one of the ultimate goals of financial regulation.
Shorts & Curlies
Analogous to major shareholding, where ownership is rewarded when the company’s price rises, is shorting, where the short seller benefits when the price falls. We don’t have enough space to go into the pros & cons of short selling, but it’s safe to say that other than in a few jurisdictions, short selling is common practise. In the vast majority of countries where short selling isn’t outright banned, there is a short selling disclosure regime. The EU [in]famously introduced regulation on short disclosure in November 2012 which ensured that all shorts above 0.2% were made known to the regulator and those above 0.5% were made public.
US Exceptionalism
Despite the EU, Australia, Hong Kong, Japan, Korea etc. all having short disclosure systems, the US stands nearly alone in having no such disclosure requirement. Yet.
From a pure information symmetry perspective this seems highly illogical. A 5% long interest in a US registered/listed company requires disclosure on Schedule 13D (or Schedule 13G) and likely on Form 13F. A 5% short interest requires no disclosure whatsoever.
A 2018 Oxford University paper entitled “Show us your shorts!” (with a less punchy subtitle “How does greater public disclosure of arbitrage activity and informed trading affect informational efficiency?”) came to two conclusions:
“...the new reporting regime has an important impact on a stock’s informational environment. Specifically, information encapsulated within short interest is more quickly incorporated into prices, thereby improving informational efficiency.”
And
“...analyses show that greater short interest disclosure reduces short-sellers’ subsequent holding periods, helps them earn higher abnormal returns.”
So not only would a short selling regime increase information efficiency, it would also likely help market participants earn higher returns!
PROGRESS REPORT
Various parties have been pushing for a US short disclosure regime. In 2012, after the Herbalife scandal the New York Times wrote in a piece entitled “Disclosure by Short-Sellers Would Improve Market Clarity”:
“The markets would function more smoothly if Mr. Einhorn were required to disclose whether he had a significant short position. This would let people see if he is merely talking or has real money at stake.”
Edward S. Knight, General Counsel & Chief Regulatory Officer of Nasdaq wrote an extremely thorough “Petition for Rulemaking to Require Disclosure of Short Positions in Parity with Required Disclosure of Long Positions” email to the SEC in December 2015. He concluded:
“There is no policy or practical reasons to maintain the current disparity and differentiated disclosure regimes in the U.S. for long and short positions. Indeed, the policies that underlie Section 13 disclosure requirements applicable to investors with long positions - transparency, fairness and efficiency - apply equally to investments with short positions. Dodd-Frank demands the Commission to close this gap in the regulatory disclosure regime and level the playing field.”
In June 2017 the CEO of the NYSE, Tom Farley also called for disclosure of short ownership, summarising “let's have a little more transparency”.
There are signs that things might finally change, the Brokaw Act was introduced to the senate in August 2017 and has cross-party support. Named after a town in Wisconsin its aim is threefold:
- Disclosure of short interests
- Reduction in the number of days to disclose long interests (13D/13G) and finally
- That derivatives be included in long ownership.
Summary
There seems to be a perfect storm behind the calls for disclosure of short interests in the US:
- It’s patently illogical to disclose long interests but not short
- Studies have proven that short disclosures improve market transparency and even produce higher returns
- Massive market participants such as NASDAQ & NYSE are in favour
- Lawmakers have begun to push for reform
Until then your shorts are safe with U.S.!
