existing information collections burdens associated with Rule 613 and
the CAT NMS Plan Approval Order submitted under OMB number 3235-
0671.\178\ Because this information is already collected and maintained
by market makers that engage in equity trading and claim the exception
pursuant to Rule 17a-3 of the Exchange Act, the Commission believes
there is no new ongoing burden associated with collecting or recording
the information necessary to effectuate CAT reporting of this new
element.
---------------------------------------------------------------------------

    \178\ See supra note 165.
---------------------------------------------------------------------------

c. Summary of Initial One-Time Burdens Relating to Proposal To Amend
CAT

--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                             Number of     Initial one-   Aggregate one-
      Name of information collection               Type of burden            entities       time hourly     time hourly    Initial one-   Aggregate one-
                                                                             impacted         burden          burden         time cost       time cost
--------------------------------------------------------------------------------------------------------------------------------------------------------
CAT: Central Repository--Short Sale Data..  Recordkeeping...............              25               5             130       $4,060.80        $101,520
CAT: Reporting of Buy to cover Information  Third Party Disclosure......             126             260          32,760          15,000       1,890,000
 for Orders--Insourcers.
CAT: Reporting of Buy to cover Information  Third Party Disclosure......           1,092              10          10,920           1,000       1,092,000
 for Orders--Outsourcers.
CAT: Reporting of Bona Fide Market Making   Third Party Disclosure......              60             260          15,600          15,000         900,000
 Exception--Insourcers.
CAT: Reporting of Bona Fide Market Making   Third Party Disclosure......              44              10             440           1,000          44,000
 Exception--Outsourcers.
--------------------------------------------------------------------------------------------------------------------------------------------------------

E. Collection of Information Is Mandatory

    The proposed information collections are required under Proposed
Rule 13f-2 and Proposed Form SHO for Managers that meet one of the
Reporting Thresholds, Proposed Rule 205 for broker-dealers that effect
purchase orders for accounts with open short positions in the equity
securities being purchased, and the Proposal to Amend CAT for Plan
Participants to collect and process new CAT reportable information and
for CAT Industry Members that engage in certain short sale activity.

F. Confidentiality

    As discussed above, Proposed Rule 13f-2 would require certain
Managers to file monthly in EDGAR, on Proposed Form SHO, certain short
sale volume data and short interest position data. However, the
Commission is proposing that the information reported by Managers on
Proposed Form SHO be aggregated prior to publication so as to protect
the identity of reporting Managers.
    The Commission would not typically receive confidential information
as a result of Proposed Rule 205. To the extent that the Commission
receives--through its examination and oversight program, through an
investigation, or by some other means--records or disclosures from a
broker-dealer that relate to or arise from Proposed Rule 205 that are
not publicly available, such information would be kept confidential,
subject to the provisions of applicable law.
    With respect to the Proposal to Amend CAT, Rule 613 and the CAT NMS
Plan requires that the information to be collected and electronically
provided to the Central Repository would only be available to the
national securities exchanges, national securities association, and the
Commission. Further, the CAT NMS Plan includes policies and procedures
designed to ensure the security and confidentiality of all information
submitted to the Central Repository, and to ensure that all SROs and
their employees, as well as all employees of the Central Repository,
shall use appropriate safeguards to ensure the confidentiality of such
data. The Commission would receive confidential information pursuant to
this collection of information, and such information will be kept
confidential, subject to the provisions of applicable law.

G. Request for Comments

    The Commission requests comment on whether the estimates for burden
hours and costs are reasonable. Pursuant to 44 U.S.C. 3506(c)(2)(B),
the Commission solicits comments to (1) evaluate whether the proposed
collections of information are necessary for the proper performance of
the functions of the Commission, including whether the information
would have practical utility; (2) evaluate the accuracy of the
Commission's estimate of the burden of the proposed collections of
information; (3) determine whether there are ways to enhance the
quality, utility, and clarity of the information to be collected; and
(4) determine whether there are ways to minimize the burden of the
collections of information on those who are to respond, including
through the use of automated collection techniques or other forms of
information technology.
    While the Commission welcomes any public input on this topic, the
Commission asks commenters to consider the following questions:
     Q20: Has the Commission accurately estimated the paperwork
burdens and costs to Managers associated with fulfilling the reporting
requirements of Proposed Rule 13f-2?
     Q21: Has the Commission accurately estimated the number of
Managers (1,000) anticipated to be required to file Proposed Form SHO
each month? If the estimate should be increased or decreased, please
address by how much and why.
     Q22: Has the Commission accurately estimated the amount of
time (325 hours) needed for Managers to complete initial technology
projects to facilitate fulfillment of the reporting requirements of
Proposed Rule 13f-2? If the estimate should be increased or decreased,
please address by how much and why.
     Q23: Has the Commission accurately estimated the number of
Managers each month (1,000) that will use a structured XML data
language methodology, as opposed to the web-fillable Proposed Form SHO
directly on EDGAR, to file Proposed Form SHO? Has the Commission
accurately estimated the number for Managers each month (35) that will
use a structured XML data language methodology to file an amended
Proposed Form SHO?
     Q24: Has the Commission accurately estimated the
additional paperwork burden (2 hours of work by a programmer) for
Managers to file a Proposed Form SHO via the structured XML data
language methodology? Is the additional burden (2 hours of work by a
programmer) more accurately categorized as an ongoing per filing burden
or an initial, one-time technological systems update burden?
     Q25: Has the Commission accurately estimated that
approximately 3.5% of Proposed Form SHO filers would also file an
amended Proposed Form SHO, resulting in additional burdens and costs
for an estimated 35 Managers each month?
     Q26: Has the Commission accurately estimated the paperwork
burdens and costs to broker-dealers associated with fulfilling the
order marking requirements of Proposed Rule 205? Has the Commission
accurately estimated the number of broker-dealers (1,218) that will be
required to update their order marking systems to incorporate the ``buy
to cover'' order mark?
     Q27: Has the Commission accurately estimated the total
number of orders marked ``buy to cover'' by broker-dealers each year
(62.25 billion)? If the estimate should be increased or decreased,
please address by how much and why.
     Q28: Is the Commission's estimation that, over the course
of a year, for every short position created by a ``short'' or ``short
exempt'' sale order, there will be an equal and opposite number of
``buy to cover'' purchase orders placed in order to cover, and
ultimately close out, those short positions, an accurate projection of
how frequently ``buy to cover'' order marks will be used? If there is a
more accurate means of estimating the volume of anticipated annual
``buy to cover'' order marks, please describe its structure and why it
is more accurate.
     Q29: Has the Commission accurately estimated the ratio of
orders to trades (14.4:1) used to calculate the total number of
anticipated ``buy to cover'' orders? If the estimate should be
increased or decreased, please address by how much and why.
     Q30: Has the Commission accurately estimated the time it
takes (between .042 and .5 seconds) for a broker-dealer to properly
mark a purchase order as ``buy to cover'' for an account that holds a
gross short position in the security being purchased? If the estimate
should be increased or decreased, or the range narrowed, please address
by how much and why.
     Q31: Has the Commission accurately estimated the cost to
broker-dealers ($170,000) to update their order marking systems, or is
such a cost likely to have decreased for reasons including
technological advances? If the estimate should be increased or
decreased, please address by how much and why.
     Q32: Has the Commission accurately captured the market
participants who would be subject to

the burdens and costs under the Proposal to Amend CAT?
     Q33: Has the Commission accurately estimated the number of
Industry Members anticipated to be required to report new information
to the CAT under the Proposal to Amend CAT?
     Q34: Has the Commission accurately estimated the paperwork
burdens and costs to market participants associated with the Proposal
to Amend CAT?
    Persons wishing to submit comments on the collection of information
requirements should direct the comments to the Office of Management and
Budget, Attention: Desk Officer for the Securities and Exchange
Commission, Office of Information and Regulatory Affairs, Washington,
DC 20503, and send a copy to Vanessa Countryman, Secretary, Securities
and Exchange Commission, 100 F Street NE, Washington, DC 20549-1090,
with reference to File No. S7-08-22. OMB is required to make a decision
concerning the collection of information between 30 and 60 days after
publication of this release. Consequently, a comment to OMB is best
assured of having its full effect if OMB receives it within 30 days of
publication. Requests for materials submitted to OMB by the Commission
with regard to these collections of information should be in writing,
refer to File No. S7-08-22, and be submitted to the Securities and
Exchange Commission, Office of FOIA Services, 100 F Street NE,
Washington, DC 20549-2736.

VIII. Economic Analysis

A. Introduction

    The Commission is proposing new reporting requirements in
connection with short sales. The Commission is mindful of the economic
effects that may result from the proposed requirements, including the
benefits, costs, and the effects on efficiency, competition, and
capital formation.\179\ The Commission believes that, if adopted,
Proposed Rule 13f-2 and Proposed Form SHO, Proposed Rule 205, and the
Proposal to Amend CAT would result in improved regulatory oversight, as
the data that would become available to regulators would close
informational gaps in the currently available data, which would in turn
benefit market participants and help foster fair and orderly markets.
More specifically, the Proposals would increase transparency and
improve regulators' examination of market behavior and recreation of
significant market events. These improvements may, in turn, discourage
abusive short selling.\180\ Proposed Rule 13f-2 would also increase
transparency for market participants about short selling, which could
help refine market participants' understanding of the level of negative
sentiment and the actions of short sellers.
---------------------------------------------------------------------------

    \179\ Exchange Act Section 3(f) requires the Commission, when it
is engaged in rulemaking pursuant to the Exchange Act and is
required to consider or determine whether an action is necessary or
appropriate in the public interest, to consider, in addition to the
protection of investors, whether the action would promote
efficiency, competition, and capital formation. See 15 U.S.C.
78c(f). In addition, Exchange Act Section 23(a)(2) requires the
Commission, when making rules pursuant to the Exchange Act, to
consider among other matters the impact that any such rule would
have on competition and not to adopt any rule that would impose a
burden on competition that is not necessary or appropriate in
furtherance of the purposes of the Exchange Act. See 15 U.S.C.
78w(a)(2).
    \180\ See infra Part VIII.D.1 (for additional discussion on
potential abusive short selling practices).
---------------------------------------------------------------------------

    The Proposals may also lead to tradeoffs in market quality. A
reduction in abusive short selling and improved regulatory oversight
may have a positive impact on market quality. Furthermore, the
Proposals would provide market participants improved transparency into
short selling which could also improve price efficiency. However,
Proposed Rule 13f-2 and Proposed Form SHO could chill short selling by
increasing the costs and risks of implementing large short positions,
which could reduce the positive effects of short selling on market
quality. Furthermore, public disclosure of information resulting from
Proposed Rule 13f-2 and Proposed Form SHO could facilitate short
squeezes, which could reduce market quality for all.\181\
---------------------------------------------------------------------------

    \181\ See infra Part VIII.D.1. The Commission expects that for
many securities, a limited number of Manager positions may surpass
the reporting requirement thresholds. Given the eventual public
release of the aggregate position sizes, there is a risk that other
market participants will be able to potentially identify the
Managers with large short positions and orchestrate short squeeze
efforts against them (should they seem vulnerable against a short
squeeze). Nevertheless, the Commission maintains the ability of
identifying such behavior using CAT data, which could mitigate
initiation of such behavior.
---------------------------------------------------------------------------

    In addition to the indirect costs to market quality, Proposed Rule
13f-2, Proposed Form SHO, Proposed Rule 205, and the Proposal to Amend
CAT could impose significant compliance costs on market participants.
The proposal to require Managers to report large positions and activity
would likely impose significant initial and ongoing costs on Managers.
Proposed Rule 205 and the Proposal to Amend CAT could impose large
initial costs and ongoing compliance costs on broker-dealers.
    The Commission has considered the economic effects of the Proposals
and wherever possible, the Commission has quantified the likely
economic effects of the Proposals. The Commission is providing both a
qualitative assessment and quantified estimates of the potential
economic effects of the Proposals where feasible. The Commission has
incorporated data and other information to assist it in the analysis of
the economic effects of the Proposals. However, as explained in more
detail below, because the Commission does not have, and in certain
cases does not believe it can reasonably obtain, data that may inform
the Commission on certain economic effects, the Commission is unable to
quantify certain economic effects. Further, even in cases where the
Commission has some data, quantification is not practicable due to the
number and type of assumptions necessary to quantify certain economic
effects, which render any such quantification unreliable. Our inability
to quantify certain costs, benefits, and effects does not imply that
the Commission believes such costs, benefits, or effects are less
significant. The Commission requests that commenters provide relevant
data and information to assist the Commission in quantifying the
economic consequences of Proposed Rule 13f-2, Proposed Form SHO,
Proposed Rule 205, and Proposal to Amend CAT.

B. Economic Justification

    The Commission is proposing the required Manager reporting and
disclosures, in part, to implement the specific statutory mandate of
Section 929X of the Dodd-Frank Act. Accordingly, many of the costs and
benefits of Proposed Rule 13f-2 and Proposed Form SHO stem from the
Commission's response to the statutory mandate. In addition, the
Commission is exercising discretion in its design and implementation of
Proposed Rule 13f-2 and Proposed Form SHO, and recognizes that this
discretion has economic effects. Specifically, the Commission is using
this discretion to ensure that the proposed disclosures are additive to
currently available data and would be useful to both market
participants and regulators, with a focus on addressing data
limitations exposed by the market volatility in January 2021. Finally,
Proposed Rule 205 and Proposal to Amend CAT address such data
limitations outside of the context of the statutory mandate of Section
929X.
    CAT data, as well as other currently available data, can be used by
regulators for surveillance, examinations, investigations, and other
enforcement

functions, for the analysis and reconstruction of market events, and
for more general market analysis and research. At times, these
activities would benefit from information on customer or market
participant positions and how those positions change over time. CAT was
not designed to track such positions, and Staff experience in
reconstructing the events of January 2021 provided insights into the
challenges of using existing CAT data for this purpose. Other existing
data sources, including public data sources, are also limited for these
purposes and also for informing members of the public and market
participants. Specifically, current data (1) fails to distinguish
economic short exposure from hedged positions or intraday trading, (2)
fails to distinguish the type of trader short selling or identify
individual short positions, even for regulatory use, and (3) fails to
capture the various ways that short positions can change and the
various ways to acquire short exposure. The Proposals are designed to
address these data limitations.
    Existing data sources fail to accurately represent the economic
short exposures of Managers due to several limitations. While existing
data report aggregate short positions on a bi-monthly basis, they do
not reflect the timing with which short positions expand or shrink in
the two-week period between the two reporting dates.\182\ Some data
sources report daily short sale volume \183\ without distinguishing
short sale transactions that affect economic short exposures from those
meant for purposes such as liquidity provision or hedging of long
positions. As such, the existing short volume data may not be combined
with the bi-monthly short interest data to construct aggregate daily
short positions. Existing securities lending data that may be
considered indirect measures of short interest are expensive,
incomprehensive, and biased--in particular, security loans may serve
purposes other than covering short positions, e.g., cover failure to
deliver or borrowing cash by the lender. No existing data identify
short positions by individual traders. Even though some regulatory data
identify short transactions of individual traders, they may not be
utilized to reconstruct short positions because economic short exposure
may change in the absence of any short sale transactions.
---------------------------------------------------------------------------

    \182\ FINRA requires all members to report settled short
positions in equities of all customer and proprietary accounts twice
per month. According to the schedule it has adopted, FINRA publishes
the short sale data about a week after each reporting due date. See,
e.g., Short Interest Reporting, available at https://www.finra.org/filing-reporting/regulatory-filing-systems/short-interest.
    \183\ FINRA reports daily off-exchange short sale volume data
that aggregate, for each exchange-listed security, short sale
transactions reported to a FINRA TRF or ADF. See Short Sale Volume
Data, FINRA, available at https://www.finra.org/finra-data/browse-catalog/short-sale-volume-data. Registered exchanges also report
daily short sale volume aggregated at the security level, often
charging a fee. See, e.g., TAQ Group Short Sales & Short Volume, New
York Stock Exchange, available at https://www.nyse.com/market-data/historical/taq-nyse-group-short-sales.
---------------------------------------------------------------------------

    These data limitations inhibit regulators from performing functions
such as market surveillance and market reconstruction. For example, the
Commission would not have regular access to information about Managers
who hold large short positions even if those positions are held for a
long period of time. If the positions are sufficiently large and prices
move against the positions, the Commission cannot currently efficiently
assess the risk that the positions impose on the market more broadly.
Additionally, with existing data the Commission may have difficulty
reconstructing significant market events--inhibiting the Commission in
quickly understanding market events and providing efficient market
oversight.
    The data limitations also prevent the market from more fulsome
interpretations of existing short selling information. For example,
existing data can show a short interest level, but little is known
about how much of that short interest level is directional or hedged
and the extent to which short positions change between short interest
disclosures.

C. Baseline

1. Institutional Investment Managers
    The potential universe of persons who meet the definition of
Manager is expansive. Exchange Act Section 13(f)(6)(A) defines the term
``institutional investment manager'' as ``includ[ing] any person, other
than a natural person, investing in or buying and selling securities
for its own account, and any person exercising investment discretion
with respect to the account of any other person.'' \184\ Exchange Act
Section 3(a)(9) states that ``[t]he term `person' means a natural
person, company, government, or political subdivision, agency, or
instrumentality of a government.'' `` `Company' means a corporation, a
partnership, an association, a joint-stock company, a trust, a fund, or
any organized group of persons whether incorporated or not; or any
receiver, trustee in a case under title 11 of the United States Code or
similar official or any liquidating agent for any of the foregoing, in
his capacity as such.'' \185\ As a result, Managers exercising
discretion over the accounts of others could include but are not
limited to investment advisors exercising investment discretion over
client assets, including investment company assets such as mutual
funds, ETFs, and closed-end funds; banks and bank trust corporations
offering investment management services; pension fund managers;
corporations, including broker-dealers and insurance companies,
managing corporate or employee investment assets; and individuals
exercising investment discretion over the accounts of others. Also as a
result of the definition of Manager, the set of Managers excludes
natural persons buying and selling securities only for their own
account but does include natural persons exercising discretion over the
account of another person.\186\
---------------------------------------------------------------------------

    \184\ See also Exchange Act Section 3(a)(35) defining when a
person exercises ``investment discretion'' with respect to an
account.
    \185\ See Section 2(a)(8) of the Investment Company Act. The
term ``company'' in the Exchange Act ``ha[s] the same meaning[ ] as
in the Investment Company Act of 1940.'' Exchange Act Section
3(a)(19).
    \186\ To the extent that a natural person exercising discretion
over the account of another person has a short position exceeding
the proposed thresholds, that natural person would be subject to the
costs associated with Proposed Rule 13f-2 and the Proposed Form SHO.
We expect such a natural person would likely use the fillable web
form provided by EDGAR to input Proposed Form SHO disclosures. The
Commission believes that few Managers that are natural persons would
be likely to have short positions large enough to exceed the
threshold. See infra Section VIII.D.7 for more information on
Managers' costs.
---------------------------------------------------------------------------

    Notwithstanding the broad statutory definition of Manager, it is
the Commission's understanding that only a fraction of Managers of are
believed to engage in short selling and fewer still engage in any
significant short selling. Market makers, for example, engage in short
selling but, with the exception of option market makers, generally do
not hold large positions overnight. We are also aware, for example,
that advisers to both hedge funds and registered investment companies
engage in short selling to varying degrees. However, with the exception
of hedge funds, institutional investors are viewed as ``largely
absent'' from the short selling portion of the financial markets.\187\

Using actual investment strategies employed by registered investment
companies \188\ as a proxy for the number of Managers in the public
fund markets engaged in short selling, the number of such Managers is
likely to be relatively small. A Division of Economic and Risk Analysis
White Paper survey of all mutual fund Form N-SAR filings in 2014 found
that ``[w]hile 64% of all funds were allowed to engage in short
selling, only 5% of all funds actually did so.'' \189\ As of September
2021, there were 7,043 registered investment companies with total
equity positions valued at approximately $17 trillion. Of those, 152
funds had short positions with a total short position value of
approximately $17.5 billion. Of the funds with short positions of
approximately $17.5 billion, only 37 funds held positions equal to or
greater than $10 million.\190\ Additionally, according to an analysis
of publicly available Form PF data, a substantial minority of single-
strategy hedge funds employ strategies involving short selling.\191\
---------------------------------------------------------------------------

    \187\ Peter Molk and Frank Partnoy, Institutional Investors as
Short Sellers?, 99 B.U. L. Rev. 837, 839 (2019), available at
https://scholarship.law.ufl.edu/cgi/viewcontent.cgi?article=1980&context=facultypub. Molk and Partnoy's
paper ``identif[ies] the regulatory and other barriers that keep key
categories of institutions[, specifically, mutual funds, insurance
companies, banks, sovereign wealth funds, endowments, and
foundations,] from acquiring significant short positions.'' Id. at
843.
    \188\ As of July 2021, there were 10,223 mutual funds (excluding
money market funds) with approximately $18,588 billion in total net
assets, 2,320 ETFs organized as an open-end fund or as a share-class
of an open-end fund with approximately $6,447 billion in total net
assets, 736 registered closed-end funds with approximately $314
billion in total net assets, 722 unit investment trusts with
approximately $2,456 billion in total net assets, and 13 variable
annuity separate accounts registered as management investment
companies on Form N-3 with $218 billion in total net assets.
Estimates of the number of registered investment companies and their
total net assets are based on an analysis of Form N-CEN filings as
of July 31, 2021. For open-end management funds, closed-end funds,
and management company separate accounts, total net assets equals
the sum of monthly average net assets across all funds in the sample
during the reporting period. See Item C.19.a (Form N-CEN). For UITs,
we use the total assets as of the end of the reporting period, and
for UITs with missing total assets information, we use the
aggregated contract value for the reporting period instead. See Item
F.11 and F.14.c in Form N-CEN.
    \189\ Daniel Deli et al., Use Of Derivatives By Registered
Investment Companies at 8, DERA White Paper (2015), available at
https://www.sec.gov/files/derivatives12-2015.pdf.
    \190\ This is based on an analysis of data provided by
registered investment companies to the Commission on Form N-PORT.
    \191\ As of 2021 Q2, there are 1,124 hedge funds out of 6,083
Single-Strategy hedge funds (excluding fund-of-funds hedge funds)
that employ short selling in an Equity Long/Short strategy (1,062),
Equity Short-Biased strategy (18), or Fixed Income Convertible
Arbitrage strategy (44). Assets under management (AUM) in these
types of hedge funds total approximately $1.165 trillion. 2021 Q2
Private Fund Statistics, Division of Investment Management Analytics
Office, available at https://www.sec.gov/divisions/investment/private-funds-statistics.shtml. Data includes both U.S. and non-U.S.
domicile hedge funds managed by SEC-registered investment advisers
with at least $150 million in private fund assets under management.
The data does not include hedge funds that were classified as multi-
strategy on Form PF. These hedge funds could employ short selling as
part of their multi-strategy. Data for non-U.S. domicile hedge funds
with an equity short-bias strategy is not publicly available for
2021 Q2. In this case the last publicly available values were used
(7 funds with a total AUM of $1 billion) from 2019 Q3. As of the end
of 2021, hedge fund assets totaled approximately $4 trillion. Global
Hedge Fund Industry Assets Top $4 Trillion for the First Time,
Reuters (Jan. 20, 2022), available at https://www.reuters.com/business/finance/global-hedge-fund-industry-assets-top-4-trillion-first-time-2022-01-20/.
---------------------------------------------------------------------------

    While information about Managers' investments other than from funds
managed by investment advisers is limited, the Commission understands
that such other Managers, other than options market makers due to their
routine use of hedging transactions, do not frequently establish short
positions that would be large enough to be subject to the proposed
rule's reporting requirement.\192\ The Commission believes one possible
proxy for the number of Managers that could potentially have a
reporting obligation is a fraction of the number of Managers reporting
positions on Form 13F because such persons by definition manage
accounts holding Section 13(f) securities having an aggregate fair
market value of at least $100 million, making such Managers more likely
to have the resources to engage in short selling over the proposed
rule's thresholds. As of March 31, 2021, 7,550 Managers with investment
discretion over approximately $39.79 trillion reported holdings on Form
13F in Section 13(f) securities.\193\ The Commission also believes that
registered investment advisers, particularly those managing hedge
funds, are the primary Managers likely to be affected by the Proposed
Rule. Though the Commission lacks data to quantify the number affected
parties, the Commission estimates that the total number of Managers
with reporting obligations will be between 346 and 1,000.\194\
---------------------------------------------------------------------------

    \192\ For example, according to Molk and Partnoy ``insurance
companies generally are not active short sellers. Short selling by
insurance companies is used almost exclusively to hedge positions,
and generally is not used with respect to equity positions at all.''
Supra note 187 at 850. See also Molk and Partnoy discussion about
banks and trusts. ``Trust administrators . . . have a history of
adopting conservative investment strategies. Although shorting can
be used to reduce risk when matched with similar long positions,
using short selling as an income generation tool is not consistent
with the overall conservative investment tradition.'' Id. at 854.
    \193\ See Enhanced Reporting of Proxy Votes by Registered
Management Investment Companies; Reporting of Executive Compensation
Votes by Institutional Investment Managers, Exchange Act Rel. No.
93169, (Oct. 15, 2021) available at https://www.govinfo.gov/content/pkg/FR-2021-10-15/pdf/2021-21549.pdf.
    \194\ See supra section VII.B.2. for more information on the
estimates of how many managers would have reporting obligations.
---------------------------------------------------------------------------

2. Short Selling
    Short selling is a widely used market practice, which allows
investors to profit if an asset declines in value or to hedge risks.
Market participants can build an economic short positions using
traditional means (i.e., borrowing shares and selling them into the
market to buy back later) or they can gain short exposure using
derivatives. This section provides an overview of the current state of
obtaining short exposure to equities and the different means of short
selling--i.e., traditional means and using derivatives. This
information is based on the current state of research using existing
data.
i. Short Selling Equities
    A short sale is the sale of a security that the seller does not own
or any sale that is consummated by the delivery of a security borrowed
by, or for the account of, the seller.\195\ In general, short selling
is used to profit from an expected downward price movement, to provide
liquidity in response to unanticipated demand, or to hedge the risk of
an economic long position in the same security or in a related
security. To short sell a stock, the short seller borrows shares of a
stock from a lender--typically a long-term investor such as a mutual
fund or pension fund--and sells those shares into the market. Later,
the short seller purchases the same number of shares and returns them
to the lender. The profit on the transaction for the short seller is
the difference between the price at which the shares were initially
sold and the price at which the investor re-purchased the shares--less
any fees such as securities lending fees. If the price of the stock
goes down then this difference will be positive and the investor will
make money.
---------------------------------------------------------------------------

    \195\ See Rule 200(a) of Regulation SHO, 17 CFR 242.200(a). See
also Regulation SHO Adopting Release, supra note 4.

---------------------------------------------------------------------------

    In addition to short selling based on negative sentiment, market
participants also short sell to hedge existing positions. Hedging is a
particularly potent motive to short sell a stock for options market
makers who can hedge the risk of writing a call option by short selling
the underlying stock in the stock market. Other investors use short
selling to hedge out an unwanted component of a stock's return. For
example, an investor who wants to buy a particular stock to trade on
stock specific information but does not want to expose itself to
industry risk can hedge industry risk by short selling an industry
index ETF while purchasing the underlying security. Market makers also
use short selling extensively to maintain two sided quotes in the
temporary absence of inventory. Lastly, traders may use short selling
as part of algorithmic trading strategies attempting to detect
temporary pricing anomalies. While short selling to trade on
information or to hedge generally results in short positions that are
held for some time, market makers and algorithmic technical traders
generally close their positions by the end of the day and thus their
short positions generally do not show up in existing measures of short
interest.\196\
---------------------------------------------------------------------------

    \196\ See infra Part VIII.C.4.i (for a discussion of existing
short interest data).
---------------------------------------------------------------------------

    Short selling generally entails more risk than holding a long
position. At worst, a buyer of a long position can lose its entire
investment. This is not true for a short seller. If the stock price
increases from the short sale price, the investor loses money and since
prices could potentially rise indefinitely, the short seller could lose
more than the value of its original investment. Additionally, margin
requirements for short selling are typically 150%--including the
proceeds of the short sale plus an additional 50% of the value of the
short position.\197\ If the stock price goes up, the investor may
receive a margin call, which would require the investor to commit
additional assets to meet margin requirements. To protect itself from
losses, if an investor is unable to meet margin requirements, the
broker-dealer may close the short position at a significant loss to the
short seller. These dynamics can make it difficult for investors to
maintain short positions in highly volatile stocks.
---------------------------------------------------------------------------

    \197\ Regulation T specifies that in most situations margin
requirements for equity short sales must be 150%. See 12 CFR 220.12
(1998), available at https://www.ecfr.gov/current/title-12/chapter-II/subchapter-A/part-220/section-220.12.
---------------------------------------------------------------------------

    Short selling is facilitated by the securities lending market.
Borrowing shares generally occurs two days after the short sale is
executed. This is because stock market transactions normally settle two
business days after the transaction occurs, while securities lending
transactions settle on the same day.\198\ Consequently, a short seller
(or their broker-dealer) will gauge the ability to borrow shares prior
to executing the short sale, referred to as obtaining a ``locate,'' but
would actually borrow the share on the day that they are required to
deliver the share to settle the stock market transaction.
---------------------------------------------------------------------------

    \198\ There have been recent efforts by industry members to
shorten the settlement cycle to one business day. Furthermore, the
Commission has proposed to shorten the settlement cycle. Shortening
the Securities Transaction Settlement Cycle, Exch. Act Rel. No.
94196 (Feb. 9, 2022) available at https://www.sec.gov/rules/proposed/2022/34-94196.pdf. See also SIFMA, ICI, DTCC and Deloitte,
Accelerating the U.S. Securities Settlement Cycle to T+1 (Ver. 1.0)
(Dec. 1, 2021), available at https://www.sifma.org/wp-content/uploads/2021/12/Accelerating-the-U.S.-Securities-Settlement-Cycle-to-T1-December-1-2021.pdf.
---------------------------------------------------------------------------

    Short selling is prevalent in equity markets in general. A common
ratio used to capture the amount of short selling is the short interest
ratio, which measures the fraction of shares sold short at a given
point in time divided by the total shares outstanding for that
security. Figure 1 below presents the time series average for short
interest outstanding for equities with different characteristics. This
Figure shows that short interest tends to be higher for small-cap
stocks than for mid- or large-cap stocks.
    Another way to measure the prevalence of short selling in financial
markets is by analyzing the fraction of transactions that involve a
short seller. Short sellers are involved in nearly 50% of trading
volume, while only about 2% of shares outstanding are held short in the
U.S. equity markets.\199\ This average volume of short selling tends to
be much higher than the typical changes in short interest,\200\
suggesting that a significant fraction of short selling volume is
reversed very quickly. Such short selling may be more indicative of the
fact that short selling is a key component of modern market making
strategies and technical algorithmic trading.\201\
---------------------------------------------------------------------------

    \199\ See supra note 6, Figure F.1 in the DERA 417(a)(2) Study
(showing that the level of short selling as a percentage of trading
volume grew from 2007 to 2013 to about 50%). See also D. Rapach,
M.C. Ringgenberg, and G. Zhou, Short Interest and Aggregate Stock
Returns, J. of Fin. Econ. 46-65 (2016).
    \200\ The Commission analyzed trading volume for common shares
during the year 2019. This analysis revealed that the average common
share during this period traded approximately five percent of shares
outstanding each week, with approximately half of all trades
involving short sellers. Consequently, total short selling volume
amounts to approximately five percent of shares outstanding every
two weeks for a typical stock. In contrast, from 2015-2019, absolute
changes in short interest approximately every two weeks have equaled
about a half of a percent of shares outstanding. Thus the total
amount of short selling volume occurring is an order of magnitude
larger than the changes in short interest over the same time period.
These statistics suggest that the majority of short selling
transactions likely do not involve long term traders building short
positions. Additionally, the correlation coefficient for bi-monthly
changes in short interest and short selling volume in 2019 is only
about 0.018. This low correlation suggests that the economic forces
driving total short selling volume and changes in short interest are
likely different.
    \201\ See infra Part V.4.iii (for a more detailed discussion of
short selling and liquidity provision).
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BILLING CODE 8011-01-P

[GRAPHIC] [TIFF OMITTED] TP16MR22.034

BILLING CODE 8011-01-C
ii. Taking Short Positions via Derivatives
    Trading in derivatives affects short selling in two key ways.
First, derivatives offer investors an alternative means to express
negative sentiment rather than short selling the stock. For instance,
an investor wishing to profit from the decline of a security's value
can also trade in various derivative contracts, including options and
security-based swaps. Confirming this alternative means of short
selling, academic research shows that investors do indeed use options
as an alternative means to obtain short-like economic exposure when
standard short selling is restricted.\202\
---------------------------------------------------------------------------

    \202\ See Robert Battalio and Paul Schultz, Regulatory
Uncertainty and Market Liquidity: The 2008 Short Sale Ban's Impact
on Equity Option Markets, 66 J. of Fin. 2013-2053 (2011); B.D.
Grundy, B. Lim, and P. Verwijmeren, Do Option Markets Undo
Restrictions on Short Sales? Evidence from the 2008 Short-Sale Ban,
106 J. of Fin. Econ. 331-348 (2012). See also G.J. Jiang, Y.
Shimizu, and C. Strong, Back to the Futures: When Short Selling is
Banned (2019), available at https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3420275.
---------------------------------------------------------------------------

    Among the most popular derivative contracts are options,
specifically put and call options. Call options give the owner of the
option the right but not the obligation to purchase a stock at a
specific price on a future date. Put options are similar, but give the
owner

of the option the right but not the obligation to sell a stock at a
specific price at a future date. In a put option the seller of the
option is taking a long position in the underlying security while the
purchaser of the put is taking a short position. The opposite is true
for a call option.
    In addition to options, convertible securities (in which the
security can be converted into an equity security) and security-based
swaps can be used to create the same economic exposure as a short
position.\203\ Security-based swaps include total-return swaps in which
two counterparties agree to exchange or ``swap'' payment with each
other as a result of changes in a security characteristic, such as the
its price.\204\ As with options, in each of these derivative contracts
one party is inherently long and the other party is inherently short.
These derivatives, and other more exotic derivatives, tend not to be as
standardized as options, and are traded over-the-counter. Security-
based swap transactions are reported to and publicly disseminated by
security-based swap data repositories.\205\
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    \203\ On September 19, 2019 the Commission approved the
``Recordkeeping and Reporting Requirements for Security-Based Swap
Dealers, Major Security-based Swap Participants, and Broker-
Dealers'' which established a regulatory regime for security-based
swaps under Title VII of the Dodd-Frank Act. See Recordkeeping and
Reporting Requirements for Security-Based Swap Dealers, Major
Security-Based Swap Participants, and Broker-Dealers, Exchange Act
Release No. 87005 (Sept. 19, 2019), 84 FR 68550 (Dec. 16, 2019),
available at https://www.sec.gov/rules/final/2019/34-87005.pdf.
    \204\ On July 9, 2012, the Commission approved rules and
definitions of Security based swaps. See 17 CFR 230, 240-241;
Further Definition of ``Swap,'' ``Security-Based Swap,'' and
``Security-Based Swap Agreement''; Mixed Swaps; Security-Based Swap
Agreement Recordkeeping, Commodity Futures Trading Commission and
Securities and Exchange Commission, available at https://www.sec.gov/rules/final/2012/33-9338.pdf.
    \205\ See, e.g., Regulation SBSR--Reporting and Dissemination of
Security-Based Swap Information, Exchange Act Release No. 74244
(Feb. 11, 2015), 80 FR 14563 (Mar. 19, 2015) (``2015 Regulation SBSR
Adopting Release''); Security-Based Swap Data Repository
Registration, Duties, and Core Principles, Exchange Act Release No.
74246 (Feb. 11, 2015), 80 FR 14437 (Mar. 19, 2015); Regulation
SBSR--Reporting and Dissemination of Security-Based Swap
Information, Exchange Act Release No. 78321 (July 14, 2016), 81 FR
53545 (Aug. 12, 2016) (``2016 Regulation SBSR Adopting Release'').
See also Order Approving Application for Registration as a Security-
Based Swap Data Repository, available at https://www.sec.gov/rules/other/2021/34-91798.pdf.
---------------------------------------------------------------------------

    In addition to providing an alternative means of expressing a
bearish sentiment, trading in derivatives frequently leads to related
trading in the stock market as derivatives' counterparties seek to
hedge their risk. For example, an options market maker who sells a put
has taken on long exposure to the underlying security and may hedge
this position by opening a short position in the underlying security.
Thus, option market makers who sell large quantities of put options may
amass large short positions in the underlying equities to hedge their
options exposure.
3. Current Short Selling Regulations
    Compliance with Regulation SHO began on January 3, 2005.\206\ The
Commission adopted Regulation SHO to update short sale regulation in
light of numerous market developments since short sale regulation was
first adopted in 1938 and to address concerns regarding persistent
failures to deliver and potentially abusive ``naked'' short
selling.\207\
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    \206\ See Regulation SHO Adopting Release, supra note 3.
    \207\ In a ``naked'' short sale, the seller does not borrow or
arrange to borrow the securities in time to make delivery to the
buyer within the standard two-day settlement cycle. As a result, the
seller fails to deliver securities to the buyer when delivery is due
(also known as a ``failure to deliver'').
---------------------------------------------------------------------------

    In adopting Regulation SHO, the Commission recognized that short
sales can provide important pricing information \208\ and liquidity to
the market.\209\ However, the Commission was also concerned with the
negative effect that failures to deliver may have on shareholders and
the markets. For example, large and persistent failures to deliver may
deprive shareholders of the benefits of ownership, such as voting and
lending, and sellers that fail to deliver securities on settlement date
may attempt to use their failures to engage in trading activities to
improperly depress the price of a security.
---------------------------------------------------------------------------

    \208\ Efficient markets require that prices fully reflect all
buy and sell interest. Market participants who believe a stock is
overvalued may engage in short sales in an attempt to profit from a
perceived divergence of prices from true economic values. Such short
sellers add to stock pricing efficiency because their transactions
inform the market of their evaluation of future stock price
performance. This evaluation is reflected in the resulting market
price of the security. See Exchange Act Release No. 48709 (October
28, 2003), 68 FR 62972 (November 6, 2003), available at https://www.sec.gov/rules/proposed/34-48709.htm#P179_15857.
    \209\ Market liquidity is generally provided through short
selling by market professionals, such as market makers, who offset
temporary imbalances in the buying and selling interest for
securities. Short sales effected in the market add to the selling
interest of stock available to purchasers, and reduce the risk that
the price paid by investors is artificially high due to a temporary
contraction of selling interest. Short sellers covering their sales
also may add to the buying interest of stock available to sellers.
See Exchange Act Release No. 48709 (October 28, 2003), 68 FR 62972
(November 6, 2003), available at https://www.sec.gov/rules/proposed/34-48709.htm#P179_15857.
---------------------------------------------------------------------------

    Due to continued concerns regarding failures to deliver, and to
promote market stability and preserve investor confidence, the
Commission has amended Regulation SHO on several occasions. For
example, the Commission eliminated certain original exceptions to
Regulation SHO's close-out requirements,\210\ strengthened those same
close-out requirements by adopting Rule 204,\211\ and reintroduced a
short sale price test restriction by adopting Rule 201.\212\ In
addition, the Commission adopted a targeted antifraud rule, Rule 10b-
21, to further address failures to deliver in securities that have been
associated with ``naked'' short selling.\213\
---------------------------------------------------------------------------

    \210\ As initially adopted, Regulation SHO included two major
exceptions to its then existing close out requirements: The
``grandfather'' provision and the ``options market maker''
exception. Due to continued concerns regarding failures to deliver,
and the fact that the Commission continued to observe certain
securities with failures to deliver that were not being closed out
consistent with its then existing close out requirements, the
Commission eliminated the ``grandfather'' provision in 2007 and the
``options market maker'' exception in 2008. See Exchange Act Release
No. 56212 (Aug. 7, 2007), 72 FR 45544 (Aug. 14, 2007) (eliminating
the ``grandfather'' provision to Regulation SHO's close out
requirement), available at https://www.sec.gov/rules/final/2007/34-56212fr.pdf; Exchange Act Release No. 58775 (Oct. 14, 2008), 73 FR
61690 (Oct. 17, 2008) (eliminating the ``options market maker''
exception to Regulation SHO's close out requirement), available at
https://www.sec.gov/rules/final/2008/34-58775fr.pdf.
    \211\ In 2008, the Commission adopted temporary Rule 204T, and
in 2009 adopted Rule 204. Rule 204 further strengthens Regulation
SHO's close out requirements by making those requirements applicable
to failing to deliver results from sales of all equity securities,
while reducing the time-frame within which failures to deliver must
be closed out. See Exchange Act Release No. 60388 (July 27, 2009),
74 FR 38266 (July 31, 2009), available at https://www.sec.gov/rules/final/2009/34-60388fr.pdf.
    \212\ In 2004, the Commission initiated a year-long pilot to
study the removal of short sale price tests for approximately one-
third of the largest stocks. After review of the pilot's data, the
Commission proposed the elimination of all short sale price tests.
In June 2007, the Commission adopted a rule that eliminated all
short sale price tests, including Rule 10a-1, a predecessor to
Regulation SHO. The rule became effective in July 2007. In 2010, the
Commission reinstituted a short sale price test restriction by
adopting Rule 201. See Exchange Act Release No. 61595 (Feb. 26,
2010), 75 FR 11232 (Mar. 10, 2010), available at https://www.sec.gov/rules/final/2010/34-61595fr.pdf.
    \213\ Rule 10b-21 is an antifraud provision intended to
supplement existing antifraud rules, including Rule 10b-5, and to
further evidence the liability of short sellers. This includes
broker-dealers acting for their own accounts, who deceive specified
persons about their intention or ability to deliver securities in
time for settlement, while failing to deliver securities by
settlement date. Among other things, the rule highlights the
specific liability of short sellers who deceive their broker-dealers
about their source of borrowable shares for purposes of complying
with Regulation SHO's ``locate'' requirement, or who misrepresent to
their broker-dealers that they own the shares being sold and
subsequently fail to deliver shares. See supra note 12, Exchange Act
Release No. 58774, available at https://www.sec.gov/rules/final/2008/34-58774.pdf.

---------------------------------------------------------------------------

    Regulation SHO requires broker-dealers to properly mark sale orders
as ``long,'' ``short,'' or ``short exempt,'' to locate a source of
shares prior to effecting a short sale (also known as the ``locate''
requirement), and to close out failures to deliver that result from
long or short sales. In addition, if the price of an equity security
has experienced significant downward price pressure, Regulation SHO
temporarily restricts the price at which short sales may be effected.
    Regulation SHO's four general requirements are summarized below:
     Rule 200--Marking Requirement. Rule 200(g) requires that a
broker-dealer mark all sell orders of any equity security as ``long,''
``short,'' or ``short exempt.'' A sell order may only be marked
``long'' if the seller is ``deemed to own'' the security being sold and
either (i) the security to be delivered is in the physical possession
or control of the broker or dealer; or (ii) it is reasonably expected
that the security would be in the physical possession or control of the
broker or dealer no later than the settlement of the transaction. The
``short exempt'' marking requirement applies only with respect to the
Rule 201 short sale price test circuit breaker noted below.
     Rule 203(b)(1) and (2)--``Locate'' Requirement. Rule
203(b)(1) generally prohibits a broker-dealer from accepting a short
sale order in an equity security from another person, or effecting a
short sale in an equity security for its own account, unless the
broker-dealer has borrowed the security, entered into a bona-fide
arrangement to borrow the security, or has reasonable grounds to
believe that the security can be borrowed so that it can be delivered
on the date delivery is due. Rule 203(b)(2) provides an exception to
the locate requirement for short sales effected by a market maker in
connection with ``bona-fide'' market making activities.
     Rule 204--Close out Requirement. Rule 204 requires a
participant of a registered clearing agency (i.e., a clearing member)
to deliver securities to a registered clearing agency for clearance and
settlement on a long or short sale transaction in any equity security
by settlement date, or to immediately close out a failure to deliver by
borrowing or purchasing securities of like kind and quantity by the
applicable close out date. For a short sale, a participant must close
out a failure to deliver by no later than the beginning of regular
trading hours on T+3. For a long sale, or for activity that is
attributable to ``bona-fide'' market making activities, a participant
must close out a failure to deliver by no later than the beginning of
regular trading hours on T+5.
     Rule 201--Short Sale Price Test Circuit Breaker. Rule 201
generally prevents short selling, including potentially manipulative or
abusive short selling, from driving down further the price of a
security that has already experienced a significant intraday price
decline, and facilitates the ability of long sellers to sell first upon
such a decline. Rule 201 contains a short sale circuit breaker that,
when triggered by a price decline of 10% or more from a covered
security's prior closing price, imposes a restriction on the price at
which the covered security may be sold short (i.e., must be above the
current national best bid). Once triggered, the price restriction would
apply to short sale orders in that security for the remainder of the
day and the following day, unless an exception applies.
    In addition, Rule 105 of Regulation M generally prohibits
participation in secondary offerings by persons who have sold short
during the restricted period before the offering.
    Regulation SHO imposes certain recordkeeping obligations on broker-
dealers. However, the Commission does not have any information on how
often the bona fide market making exception is used. Furthermore, bona
fide market making information is not reported on a regular basis,
instead the Commission must request bona fide market making records on
a broker-dealer by broker-dealer basis.\214\
---------------------------------------------------------------------------

    \214\ See supra Part VI.B (Reliance on Bona Fide Market Making
Exception, for more information on the inefficiencies of not having
a systematic way of capturing bona fide market making activities).
---------------------------------------------------------------------------

    In addition, regulations currently do not require market
participants to record, report, or track when short sellers buy-to-
cover their short sales. This makes it difficult for regulators to
assess compliance with Rule 105 and with close out requirements in Rule
204.
4. Existing Short Selling Data
    There are several sources of short selling data that are available
both publicly and for regulatory purposes. In general, these data
sources lack information about levels of and the timing of changes in
economic short exposure for specific managers in specific securities.
Some sources report aggregate short positions at the security level,
but their content is not granular enough to further the understanding
of short selling strategies. Other sources provide granular short
volume information, but they are unable to distinguish short
transactions that impact short positions from those that do not and do
not contain all activity that can change short positions. Some
regulatory data sources report short transactions at the individual
investor level, but estimating short positions using these data would
be significantly inaccurate and inefficient.
i. Bi-Monthly Short Interest Data
    One of the primary data sources for aggregate short selling data is
the bi-monthly short interest data collected by FINRA.\215\ FINRA
collects aggregate short interest information in individual securities
on a bi-monthly basis as the total number of shares sold short in a
given stock as of the middle and end of each month. Then the exchange
that lists the given stock, or FINRA itself in the case of OTC stocks,
distributes the collected data.\216\ FINRA computes short interest
using information it receives from its broker-dealer members pursuant
to FINRA Rule 4560 reflecting all trades cleared through clearing
broker-dealers.\217\ FINRA Rule 4560 requires generally that broker-
dealers that are FINRA members report ``short positions'' in customer
and proprietary firm accounts in all equity securities twice a month
through FINRA's web-based Regulation Filing Applications (RFA)
system.\218\ FINRA defines ``short positions'' for this purpose simply
as those resulting from ``short sales'' as defined in Rule 200(a) of
Regulation SHO under the Exchange Act.\219\ Member firms must report
their short positions to FINRA regardless of position size.\220\ The
process of gathering and validating short interest data takes
approximately two weeks.\221\ Thus the data is available with
approximately a two week lag.
---------------------------------------------------------------------------

    \215\ See supra note 6, DERA 417(a)(2) Study at 17-18.
    \216\ See Short Interest--What It Is, What It Is Not, FINRA
Inv'r Insights (Apr. 12, 2021), available at https://www.finra.org/investors/insights/short-interest.
    \217\ Id. (Short interest for a listed security at any date
reported by FINRA is ``a snapshot of the total open short positions
in a security existing on the books and records of brokerage firms
on a given date.'').
    \218\ FINRA Rule 4560 excludes short sales in ``restricted
equity securities,'' as defined in Securities Act Rule 144, from the
reporting requirement.
    \219\ See FINRA Rule 4560(b)(1).
    \220\ See FINRA Market Regulation Department, General for Short
Interest Reporting Instructions, (Dec. 18, 2008) (reporting
instructions to FINRA member firms), available at https://www.finra.org/Industry/Compliance/RegulatoryFilings/ShortInterestReporting/P037072.
    \221\ See supra note 6, DERA 417(a)(2) Study at 17-18.
---------------------------------------------------------------------------

    These short interest data are widely available and are used by
academics and

other market participants.\222\ These short interest data are found to
predict future stock and market returns over the monthly and annual
horizons, suggesting that the bi-monthly short interest data capture
the economic short selling based on fundamental research.\223\ However,
these data face two major limitations.\224\ First, the information
content does not provide insight into the timing with which short
positions are established or covered over the two-week reporting
period. This precludes the possibility of understanding the behavior of
aggregate economic short selling in the two weeks leading up to the
reporting date of the positions. Second, given that short interest is
aggregated at the security-level, the aggregation prevents the
Commission and the public from understanding certain aspects of the
underlying short selling activity. For example, the data cannot inform
on whether short sentiment is broadly or narrowly held or the extent to
which existing short interest is hedging in nature or based on short
sentiment.
---------------------------------------------------------------------------

    \222\ See supra note 182 (FINRA and the listing exchanges make
these data publicly available with bi-weekly updates).
    \223\ See, e.g., Peter N. Dixon and Eric K. Kelley, Business
Cycle Variation in Short Selling Strategies: Picking During
Expansions and Timing During Recessions, J. of Fin. and Quantitative
Analysis (Forthcoming); see also Ekkehart Boehmer, Zsuzsa R. Huszar,
and Bradford D. Jordan, The Good News in Short Interest, 96 (1)
Journal of Financial Economics 80-97 (2010); Stephen Figlewski, The
Informational Effects of Restrictions on Short Sales: Some Empirical
Evidence, 16 (4) J. of Fin. and Quantitative Analysis 463-476
(1981).
    \224\ See supra note 33.
---------------------------------------------------------------------------

ii. Short Selling Volume and Transactions From SROs
    Since 2009, many SROs have been publishing two short selling data
sets, including same day publication of daily aggregated short sale
volume in individual securities \225\ and publication of short sale
transaction information on no more than a two-month delay.\226\ Some
SROs make the historical daily short volume data available to market
participants for a fee.\227\ The fact that market participants and
academic users pay these subscription fees indicate that these data are
utilized. In addition to these daily short volume data, FINRA provides
intraday short sale transaction information for the orders that execute
and information from FINRA's Trade Reporting Facility (``TRF'') and
Alternative Display Facility (``ADF'') \228\ (the TRF and ADF are
together referred to herein as ``FINRA's Reporting Facilities'').
Overall, these different sources of daily and intraday short volume
data provide greater, though different, levels of granularity relative
to the bi-monthly short interest observations discussed earlier.
---------------------------------------------------------------------------

    \225\ See Short Sale Volume and Transaction Data, available at
https://www.sec.gov/answers/shortsalevolume.htm; (showing hyperlinks
to the websites where SROs publish this data). See also supra note
183. See, e.g., FINRA's Daily Short Sale Volume Files (which provide
aggregated volume by security on all short sale trades executed and
reported to a FINRA reporting facility during normal market hours).
See FINRA Information Notice, Publication of Daily and Monthly Short
Sale Reports (Sept. 29, 2009), available at https://www.finra.org/sites/default/files/NoticeDocument/p120044.pdf.
    \226\ See FINRA's Monthly Short Sale Transaction Files (which
provide detailed trade activity of all short sale trades reported to
a consolidated tape. See supra note 183; See also Short Sale Volume
and Transaction Data, available at https://www.sec.gov/answers/shortsalevolume.htm. Additional transaction data has been available
at various times, including transaction data from the Regulation SHO
Pilot, which has been discontinued by most exchanges in July 2007
when the uptick rule was removed. See Exchange Act Release No. 55970
(Jun. 28, 2007), 72 FR 36348 (July 3, 2007), available at https://www.sec.gov/rules/final/2007/34-55970.pdf. The Pilot data comprised
short selling records available from each of nine markets: American
Stock Exchange, Archipelago Exchange, Boston Stock Exchange, Chicago
Stock Exchange, NASD, Nasdaq Stock Market, New York Stock Exchange,
National Stock Exchange, and the Philadelphia Stock Exchange. See
SEC Division of Trading and Markets, Regulation SHO Pilot Data FAQ,
available at https://www.sec.gov/spotlight/shopilot.htm#pilotfaq.
    \227\ See, e.g., TAQ Group Short Sale & Short Volume, New York
Stock Exchange, available at https://www.nyse.com/market-data/historical/taq-nyse-group-short-sales (for short sale data relating
to all NYSE owned exchanges). See Short Sale Volume and Transaction
Reports from Nasdaq Trader, available at https://nasdaqtrader.com/Trader.aspx?id=shortsale (for short sale data for Nasdaq exchanges);
see also Short Sale Daily Reports, Chicago Board Options Exchange,
(for Cboe exchanges) available at https://www.cboe.com/us/equities/market_statistics/short_sale/.
    \228\ Each TRF provides FINRA members with a mechanism for the
public reporting of transactions effected otherwise than on an
exchange. See FINRA, Market Transparency Trade Reporting Facility,
available at https://www.finra.org/Industry/Compliance/MarketTransparency/TRF/.
---------------------------------------------------------------------------

    Despite offering higher granularity, these existing short volume
data provided by the SROs and FINRA have a number of limitations.
First, the data does not provide insight into the activities of either
individual traders, or different trader types. Consequently, it is not
possible with existing short selling data provided by the SROs and
FINRA to separate trading volume associated with market makers,
algorithmic traders, investment managers, or other trader types.
    Additionally, the data does not provide insight into activities
that may reduce short exposure, thus using these data to estimate
investor sentiment is fraught. For example, these data provide
information only on short sales, whereas short positions could also
change because investors can increase or decrease their positions in
ways other than short selling the stock. For example, investors can
increase their short positions by exercising put options and delivering
borrowed shares or by delivering borrowed shares when they are assigned
call options. Investors can reduce their short positions in an equity
when they, for example, buy to cover their positions, purchase shares
in a secondary offering, convert bonds to stock, or redeem ETF shares
containing the equity. As a result of this, the short selling volume
and transactions data cannot easily explain changes in short interest,
exposing a gap between these two types of existing data.
    Aggregate short selling statistics and short selling transactions
data have different lags with which they are available. Aggregate short
selling volume statistics are usually put out by the SROs by the end of
the following business day. For the transactions data, the lag can be
much longer, and in some cases the data is released with a one month
lag--implying that some short selling transactions data are not
available for two months.
    There is also a concern that these data may over-represent the
total volume of short sales occurring in the market. This is because
Regulation SHO provides specific criteria regarding what is a long
sale.\229\ If a market participant is unclear whether their trade would
meet all the requirements at settlement to be marked a long sale, then
they may choose to mark the trade as short to not run afoul of
Regulation SHO requirements, even if the trade is likely an economic
long sale.\230\
---------------------------------------------------------------------------

    \229\ See Rule 200(g) of Regulation SHO specifies when an order
can be marked as long. See also Part III.B; note 4 Regulation SHO
Adopting Release.
    \230\ See 2009 letter from Securities Industry and Financial
Markets Association (``SIFMA'') commenting on an alternative short
sale price test, expressing concern that compliance with Regulation
SHO short selling marking requirements ``will result in a
substantial over-marking of orders as ``short'' in situations where
firms are, in fact, ``long'' the securities being sold.'' Letter
from Securities Industry and Financial Markets Association (``SIFMA
Letter''), available at https://www.sec.gov/comments/s7-08-09/s70809-4654.pdf.
---------------------------------------------------------------------------

iii. Securities Lending
    Securities lending data provides information on stock loan volume,
lending costs, and the percentage of available stock out on loan, which
some market participants use as measures of short selling.\231\ The
securities lending

industry appears to use securities lending data widely, though it is
generally available only by subscription.\232\
---------------------------------------------------------------------------

    \231\ Several commercial entities sell data on securities
lending to clients. See, e.g., 2011 Letter from Data Explorers
(``Data Explorers Letter'') (in response to the request for comment
relating to the proposed study of the cost and benefits of short
selling required by Dodd Frank Act Section 417(a)(2)), available at
https://www.sec.gov/comments/4-627/4627-152.pdf. As some commenters
have noted, stock lending facilitates short selling. See, e.g.,
Speech by Chester Spatt, former Chief Economist of the SEC (April
20, 2007), available at https://www.sec.gov/news/speech/2007/spch042007css.htm. The information sold by vendors may include
volume of loans, lending costs, and the percentage of available
stock out on loan. This data offers indirect evidence of short
selling, and some research has used stock lending data as a proxy
for actual short sales. See, e.g., Oliver Wyman, The Effects of
Short Selling Public Disclosure of Individual Positions on Equity
Markets, Alternative Investment Management Association (Feb. 2011),
available at https://www.oliverwyman.com/our-expertise/insights/2010/feb/the-effects-of-short-selling-public-disclosure-regimes-on-equity.html.
    \232\ See supra note 6, DERA 417(a)(2) Study at 22-23.
---------------------------------------------------------------------------

    The use of security lending data as proxy for economic short
interest is associated with at least two major setbacks. First,
commercial vendors of the securities lending data often impose access
restrictions via high nominal subscription fees or give-to-get models.
In this setting, the entities contributing data are mindful of whether
other entities can access to the data. As such, participation rates in
data sharing reflects strategic considerations that may lower the
extent of data shared by each entity, reducing the information content
of the pool of the data collected by each vendor. The market for these
data is dominated by three major vendors, making it difficult for a
given market participants to obtain access to comprehensive security
lending in formation from one source. To this end, the existing data
accessible by an individual market participant may not accurately proxy
short selling activity. Second, while securities lending may be
correlated with short selling, it is not a perfect measure of short
selling. In practice, securities lending may be used for purposes other
than short sales such as to cover failure to deliver or to borrow cash.
In addition, short selling that is covered within the trading day does
not require any loans, and vendors of commercial securities lending
data do not have complete information. For example, they have less than
100% of the negotiated loans and no information on borrowing from
margin accounts.\233\
---------------------------------------------------------------------------

    \233\ See supra note 6, DERA 417(a)(2) Study at 23. The
Commission has recently proposed a new rule, Rule 10c-1, and if
adopted as proposed, the Commission and market participants would
have access to comprehensive securities lending data market data
that would significantly improve current securities lending based
short selling estimates. See Reporting of Securities Loans, Exchange
Act Release No. 93613, available at https://www.sec.gov/rules/proposed/2021/34-93613.pdf.
---------------------------------------------------------------------------

iv. CAT Data
    Regulators can also extract short sale information from CAT data,
which provides order lifecycle information for stocks and options.\234\
The data contain an order mark that is a part of the ``material terms
of the trade'' that indicates whether an order is a short sale. This
order mark allows regulators to identify traders who are short selling
and to see the order entry and execution times of these short sales.
However, CAT was not designed to track traders' positions or changes in
those positions, but rather collects information to analyze trading and
order lifecycles. As such, using CAT data to estimate positions and
changes in those positions can be challenging.
---------------------------------------------------------------------------

    \234\ It is important to note that only regulators have access
to CAT data.
---------------------------------------------------------------------------

    Theoretically, one could use the order execution information in CAT
data to estimate trader positions and track how those positions change
over time. However, such estimates could be inaccurate in several
circumstances. First, CAT data do not include information on the long
or short positions held in each account at the time that Industry
Members started reporting, so CAT does not provide an appropriate
starting point for building short positions using investor-specific
transaction information. Second, some investors may establish or cover
short positions via other means that are not CAT reportable events, for
example: Secondary offering transactions; option assignments; option
exercises; conversions; or ETF creations and redemptions. Additionally,
until the Customer Account Information System (CAIS) system goes live,
which is expected in July 2022, there is no easy way to match Firm
Designated ID (FDIDs) in CAT to individual Managers. Thus it is not
currently feasible to identify the subset of CAT data pertaining to
Managers. However, once the CAIS system goes live it would be possible
for regulators to identify individuals in CAT, even if those
individuals use multiple broker-dealers.
    CAT is not designed to track positions. However, when focused on
one or few accounts, estimating positions, though potentially
inaccurate, can be manageable. Using transaction information to track
positions across a broad set of positions is inefficient. Even in
situations in which the above limitations do not apply, the use of CAT
data to estimate short positions and changes in those positions for all
or a large set of accounts is inefficient and would require a
tremendous amount of processing power, which would take time and reduce
the processing power available for other CAT queries. This hinders the
Commission's estimation of short positions in a timely fashion.
    Other than the inefficient means of estimating positions described
above, CAT does not distinguish buy orders that establish a long
position from those that cover, and therefore reduce, a short position.
While Commission staff were able to identify some short covering
activity during the volatile period in January 2021, due to the
difficulties described above, the staff analyzing the volatility
associated with meme stocks could not easily identify short covering
activity using CAT data alone and was thus hindered in their
reconstruction of key events.
    Finally, even though CAT data identifies short selling by market
makers, the data do not provide information as to whether a broker-
dealer is claiming use of the Regulation SHO exceptions for bona fide
market making.
    There are 24 national securities exchanges and one national
securities association (FINRA) that are CAT Plan Participants. There
are also 3,734 broker-dealers who have reporting obligations to CAT, as
Industry Members. These Industry Members often us third-party reporting
agents such as service bureaus for CAT reporting.
v. Exchange Act Form SH
    For a ten-month period in 2008 and 2009,\235\ the Commission
required certain institutional investment managers to submit
confidential weekly reports of their short positions in Section 13(f)
securities, other than options, on Exchange Act Form SH, through
Temporary Rule 10a3-T.\236\ De minimis short positions of less than
0.25% of the class of shares with a fair market value of less than $10
million were not required to be reported.\237\ Additionally, only
Managers that

exercise investment discretion with respect to accounts holding Section
13(f) securities having an aggregate fair market value of at least $100
million were required to report. The investment manager was required to
report short positions to the Commission on Form SH on a nonpublic
basis on the last business day of each calendar week immediately
following any calendar week in which it effected short sales,\238\ a
more frequent disclosure interval than the quarterly public reporting
of long positions required on Exchange Act Form 13F.\239\
---------------------------------------------------------------------------

    \235\ See supra note 6, DERA 417(a)(2) Study at 18.
    \236\ With respect to each applicable Section 13(f) security,
the Form SH filing was required to identify the issuer and CUSIP
number of the relevant security and reflect the manager's start of
day short position, the number and value of securities sold short
during the day, the end of day short position, the largest intraday
short position, and the time of the largest intraday short position.
The reporting requirement was implemented via a series of emergency
orders followed by an interim final temporary rule, Rule 10a3-T.
Exchange Act Release No. 58591 (Sept.18, 2008), 73 FR 55175 (Sept.
24, 2008); Exchange Act Release No. 58591A (Sept. 21, 2008), 73 FR
58987 (Sept. 25, 2008); Exchange Act Release No. 58724 (Oct. 2,
2008), 73 FR 58987 (Oct. 8, 2008); Exchange Act Release No. 58785
(Oct. 15, 2008), 73 FR 61678 (Oct. 17, 2008).
    \237\ See Exchange Act Release No. 58591 (Sept. 18, 2008), 73 FR
55175 (Sept. 24, 2008).
    \238\ See Exchange Act Release No. 58785, 73 FR at 61678.
    \239\ Id.
---------------------------------------------------------------------------

    In addition to the limited and temporary time period during which
disclosure of short positions was required to be reported on Exchange
Act Form SH, even at the regulatory level, the reporting requirements
and data had several drawbacks and limitations. One drawback was that
only Managers who exercised investment discretion with respect to
accounts holding Section 13(f) securities having an aggregate fair
market value of at least $100 million were required to file Form SH,
which excluded short-only funds and other large short sellers who did
not file Form 13F. Additionally, the report was costly as Managers
filing Form SH had a weekly reporting requirement. Additionally, data
fields in Form SH including start of day short position, gross number
of securities sold short during the day, and end of day short position
were each subject to the de minimis reporting threshold, which resulted
in unreported data points when only a subset of the fields exceeded the
de minimis threshold. Furthermore, Form SH data were not validated for
errors such as duplicate entries, missing fields, or positions that
were below the de minimis threshold and therefore did not need to be
reported, which make the data difficult to work with.\240\
---------------------------------------------------------------------------

    \240\ See supra note 80 (information on the methodology and
caveats of using Form SH data).
---------------------------------------------------------------------------

5. Competition
    Many Managers operate in the investment management industry.\241\
In broad terms, investment management is a highly competitive industry.
Investment managers compete for investors and investor funds. Among the
bases on which Managers compete are returns, fees and costs, trading
strategies, risk management, and the ability to gather information. It
is costly for investment managers to do market research to gain an
informational advantage. Investment managers who own a security have an
advantage over those who don't in that a security owner can more
cheaply trade on negative information by simply selling whereas
investment managers not owning the same security must establish some
form of short exposure, such as selling a security short, to capitalize
on any negative information that they've uncovered. Academic research
suggests that when the cost of short selling increases, a security
owner's advantage in terms of being able to profitably trade on
gathered information increases, leading investors not owning a security
to engage in less fundamental research.\242\
---------------------------------------------------------------------------

    \241\ See supra Part VIII.C.1.
    \242\ This occurs because if an investor not owning the asset
engages in fundamental research and discovers evidence that a stock
may be overpriced, then it is costly for that investor to act on
that information. This is not true for investors who own the asset
as they can simply sell the shares that they own. See, e.g., Peter
N. Dixon, Why Do Short Selling Bans Increase Adverse Selection and
Decrease Price Efficiency?, 11 (1) The Rev. of Asset Pricing Studies
122-168 (2021).
---------------------------------------------------------------------------

    Investment managers, like other investors that could be subject to
Proposed Rule 13f-2, also compete by using proprietary trading
strategies. They typically seek to trade in ways that would not expose
their strategies because, if their strategies became known to others,
the strategies could lose value and such Managers could also suffer
higher trading costs. More specifically, other traders could use
copycat trading strategies try to mimic the Managers' strategy,
potentially competing away the profitability of the strategy or other
traders could anticipate when the Managers might trade, which could
result in higher trading costs for the Manager. Some Managers also
compete for returns by engaging in securities lending whereby assets
are lent to other investors, often short sellers, for a fee. These fees
in aggregate can be substantial.\243\
---------------------------------------------------------------------------

    \243\ The securities lending market is large and complex. See
Part VI.B. (the proposing release for proposed Rule 10c-1 for a more
detailed description of this market and players), available at
https://www.sec.gov/rules/proposed/2021/34-93613.pdf.
---------------------------------------------------------------------------

    Additionally, there are 3,734 broker-dealers. These broker-dealers
also compete with each other for order flow. The broker-dealer industry
is a highly competitive industry with reasonably low barriers to entry.
Most trading activity is concentrated among a small number of large
broker-dealers, with thousands of small broker-dealers competing for
niche or regional segments of the market. To limit costs and make
business more viable, the small broker-dealers often contract with
bigger broker-dealers to handle certain functions, such as clearing and
execution, or to update technology. Larger broker-dealers often enjoy
economies of scale over smaller broker-dealers and compete with each
other to service the smaller broker-dealers who are both their
competitors and customers.\244\ Broker-dealers compete in multiple
ways: reputation, convenience, and fees. Broker-dealers typically pass
operating costs down to their customers in the form of fees.
---------------------------------------------------------------------------

    \244\ See CAT proposing release Part VII.A, available at https://www.sec.gov/rules/proposed/2010/34-62174.pdf.
---------------------------------------------------------------------------

D. Economic Effects \245\
---------------------------------------------------------------------------

    \245\ In preparing this economic analysis, the Commission
accounted for the various types of Managers that could be subject to
the reporting requirements. In general, the Commission believes that
the economic effects of the rule are more influenced by the
Managers' investment strategy and motivation for short selling
rather than by the type of Manager that is reporting. Any exceptions
are noted in the analysis. See supra Section VIII.C.1.
---------------------------------------------------------------------------

1. Investor Protection and Market Manipulation
    The Proposals could lead to better investor protection by improving
regulators' reconstruction of significant market events. They may also
assist regulators in identifying manipulative short selling strategies.
Improved identification of manipulative short selling strategies may
also serve as a deterrent to would be manipulators and thus may help
prevent manipulation. They would also improve the Commission's
observation of systemic risk. However, to the extent that Managers may
still be holding their short positions when the data becomes public,
the Commission believes that Proposed Rule 13f-2 and Proposed Form SHO
also could in some cases facilitate potentially manipulative
strategies, such as certain short squeezes. The Commission also
believes that Proposed Rule 205 and the Proposal to Amend CAT would
improve regulators' oversight of markets.
    The Commission believes that the Proposals would enhance the
Commission's and SRO's reconstruction of significant market events by
providing a clearer view into the role that short selling plays in
market events of interest. Specifically, the Commission could have used
the buy to cover information that would be provided by Proposed Rule
205 and data from Proposed Form SHO to reconstruct market events and
better understand the link between short sellers exiting their
positions and contemporaneous price volatility during the recent
volatility associated with meme stocks. For example, while short
sellers as a whole were exiting their positions during the

period of heightened volatility it may have been the case that large
short sellers were acting differently.
    The data that would be provided in Proposed Form SHO would have
provided information the Commission could have used after the fact to
examine separately short selling behavior of large short sellers.
Additionally, because short positions often take some time to create,
the Commission could have attempted to quickly identify individual
short sellers with large short positions in the various meme stocks in
January 2021 based on the most recent reports; then the Commission
could have used the enhanced CAT data to understand how these short
sellers traded during the heightened volatility.\246\
---------------------------------------------------------------------------

    \246\ It is currently not straightforward to map CAT
transactions to individual traders as the Firm Designated ID (FDID)
assigned to each account are broker-dealer specific. Thus to map a
trade reported in CAT to an individual trader would require
requesting the specific FDID for a given trader. This lack in
functionality is expected to change when the CAIS becomes
operational. This system would allow regulators to map individual
traders to their FDID's and thus pull CAT information specifically
for individual traders. Thus, while technically feasible, pulling
data from CAT for specific traders is difficult, but will become
much less so when the CAIS system becomes operational. The CAIS
system is expected to go live in July 2022. See Timeline,
Consolidated Audit Trail, available at https://www.catnmsplan.com/timeline. Additionally, some academics have critiqued the Commission
Staff's GameStop report, the Report on Equity and Options Market
Structure Conditions in Early 2021, available at https://www.sec.gov/files/staff-report-equity-options-market-struction-conditions-early-2021.pdf, and some of its methods, which were
driven by data availability. See Joshua Mitts, Robert Battalio,
Jonathan Brogaard, Matthew Cain, Lawrence Glosten, and Brent
Kochuba, A Report by the Ad Hoc Academic Committee on Equity and
Options Market Structure Conditions in Early 2021 (working paper)
(2022), available at https://papers.ssrn.com/sol3/papers.cfm?abstract_id=4030179.
---------------------------------------------------------------------------

    Additionally, the activity data provided in Proposed Form SHO would
allow the Commission to observe how large short sellers responded to
the heightened volatility, albeit with a time lag due to the filing
deadline. Specifically, the Commission would be able to observe more
precisely which days reporting short sellers were most actively
increasing or decreasing their short positions and correlate that
activity to market conditions on those days. The ``activity
categories'' reported in Proposed Form SHO would allow regulators to
identify the specific means by which large short sellers alter their
economic short exposure on high volatility days. For example, economic
short exposure may increase due to increased number of shared sold,
issuing call options, exercising put options, as well as other
activities that could raise the Manger's short position. In contrast,
economic short exposure may decrease due to purchase of shares to cover
short positions, exercising call options, issuing put options,
obtaining shares through secondary offerings or tendered conversions,
and other activities that reduce short exposure. Receiving data about
each of these categories separately would facilitate more efficient
oversight by regulators.
    Analysis of the data during periods of high volatility could help
the Commission maintain fair and orderly markets by highlighting key
economic channels and mechanisms through which short selling could
affect periods of volatility or how periods of volatility affect short
selling. This information can, in turn, allow the Commission to more
specifically tailor responses to similar or related events in the
future. While the CAT data provided by Proposed Rule 205 and the CAT
amendment data would be provided relatively quickly, the Proposed Form
SHO data would not be available for up to a one-month lag.
Consequently, while the Proposed Form SHO data would be useful in
recreating a significant market event after the fact, it would not
provide the Commission tools to examine an immediate crisis.
    The ``bona fide market making'' information from the Proposal to
Amend CAT would facilitate regulatory analysis of the use of the bona
fide market making exceptions to Regulation SHO.\247\ The bona fide
market making information from the Proposal to Amend CAT would provide
regulators investigating potential Regulation SHO violations with more
regular access to clearer evidence of whether a market maker was
relying on a bona fide market making exception. This could save a
significant amount of time during an investigation. Having regular
access to these data would provide the Commission with insight into
whether the exceptions for bona fide market making in Regulation SHO
Rules 203 and 204 are being used appropriately, which should assist in
assessing compliance with, and thus the benefits of, Regulation SHO.
---------------------------------------------------------------------------

    \247\ Two Regulation SHO rules include exceptions for bona fide
market making. Rule 203(b)(2)(iii) exempts market makers selling
short in connection with bona fide market making activities from the
requirement that a short seller must either borrow or have
reasonable grounds to believe he can borrow a security in time for
delivery prior to effecting a short sale. See 17 CFR
242.203(b)(2)(iii). Rule 204(a)(3) provides that a failure to
deliver positions attributable to bona fide market making activities
by registered market makers, options market makers, or other market
makers obligated to quote in the over-the-counter markets, must be
closed out by no later than the beginning of regular trading hours
on the third consecutive settlement day following the settlement
date (T+5), rather than the settlement day following the settlement
date (T+2). See 17 CFR 242.204(a)(3).
---------------------------------------------------------------------------

    The ``bona fide market making'' information and hedge information
could improve regulators' ability to interpret certain information in
market reconstructions. Market reconstructions can sometimes benefit
from regulators knowing when certain activity is either directional or
market neutral because the motives and profitability of such trading
types are different. The `bona fide market making' information would
help regulators separate short selling that represents market makers'
liquidity provision to facilitate investor demand from other short
selling, including other market maker short selling. Because such short
selling is more likely to be in response to customer demand, the shorts
are less likely to signify that the short seller anticipates a price
decline than if the short seller was trading directionally. Likewise,
the hedging information on Proposed Form SHO would provide information
on whether a Manager's position is fully or partially hedged at the end
of the month. From this, regulators could assess, for example, that the
activity reported on Proposed Form SHO during the month was likely not
related to hedging activity if the end of month position is not hedged,
particularly if the previous month's position was not hedged.
    Additionally, the data provided by Proposed Rule 13f-2 and Proposal
to Amend CAT would allow the Commission to detect certain types of
fraud in a timelier manner. The data provided by Proposed Rule 13f-2
would improve the timeliness of fraud detection because the Proposed
Form SHO data would provide the Commission quick flags that may signal
potential fraud. Additionally, the enhanced CAT data would provide the
Commission with regular access to improved information with which to
examine potential instances of fraud without needing to ask broker-
dealers for information.
    Improved detection of fraud may also help deter fraud, improving
price efficiency and market quality. Some market participants and
academics have raised concerns that short selling may in some instances
offer the potential for stock price manipulation, including ``short and
distort'' campaigns.\248\ In

``short and distort'' strategies, which are illegal, the goal of
manipulators is to first short a stock and then engage in a campaign to
spread unverified bad news about the stock with the objective of
panicking other investors into selling their stock in order to drive
the price down.\249\ If a ``short and distort'' campaign is suspected,
then detecting this behavior via the activity and positions data in
Proposed Form SHO would be easier than it would be using current data.
Short and distort campaigns are more likely to occur in stocks with
lower market capitalizations with less public information.\250\
Consequently, among these stocks it may not, in dollar terms, take a
very large short position to reach the 2.5% threshold in securities of
smaller reporting issuers or the $500,000 threshold in securities of
non-reporting issuers to report Proposed Form SHO. \251\ As a result,
it is likely that an entity engaging in such a practice would be
required to report Proposed Form SHO data. Consequently, if ``short and
distort'' type behavior were to be suspected, then the Commission would
be more likely to identify individuals with large short positions and
could thus quickly focus any inquiries on entities in an economic
position to potentially profit from manipulation. Then regulators could
match buy to cover trading on individual days to statements or other
actions of the investor which may indicate that the investor was
engaging in such behavior. Regulators could then use CAT data to
investigate further the trading activity of the alleged manipulator.
---------------------------------------------------------------------------

    \248\ See, e.g., Comment letters submitted with regards to Short
Sale Reporting Study Required by Dodd-Frank Act Section 417(a)(2);
See letters from Naphtali M. Hamlet (May 6, 2011); Jan Sargent (May
6, 2011); Lee R. Donais, President and CEO, L.R. Donais Company (May
8, 2011); Joseph A. Scilla (May 9, 2011); Jane M. Reichold (May 17,
2011); John Gensen (May 18, 2011); Victor Y. Wong (May 20, 2011);
Kevin Rentzsch (May 24, 2011); Lynn C. Jasper (May 27, 2011); Donald
L. Eddy (May 28, 2011); Al S. (Jun. 10, 2011); Jeffrey D. Morgan,
President and CEO, National Investor Relations Institute, at 3 (Jun.
21, 2011) (``NIRI''); Professor James J. Angel, at 2 (June 24,
2011); and Dennis Nixon, CEO and Chairman, International Bancshares
Corporation, at 1 (July 18, 2011). See all letters are available at
https://www.sec.gov/comments/4-627/4-627.shtml.
    \249\ If successful, the scheme can drive down the price,
allowing the manipulators to profit when they ``buy-to-cover'' their
short position at the reduced price. Short sellers could also engage
in price manipulations by systematically taking short positions in
one firm while taking long positions in the competitor. See Bodie
Zvi, Alex Kane, and Alan J. Marcus, Investments and Portfolio
Management, McGraw Hill Education (2011). See also Rafael Matta,
Sergio H. Rocha, and Paulo Vaz, Predatory Stock Price Manipulation,
available at https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3551282.
    \250\ See, e.g., Y. T. F. Wong and W. Zhao, Post-Apocalyptic:
The Real Consequences of Activist Short-Selling. (Working Paper)
(2017), available at https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2941015.
    \251\ Academic research has found that the average short
interest in stocks targeted by activist short sellers is about ten
percent, while it is only four percent for non-targeted firms.
Consistent with high information asymmetries, targeted firms also
appear to have wider bid-ask spreads and higher disagreement among
analysts. See W. Zhao, Activist Short-Selling and Corporate Opacity
(Working Paper) (2020), available at https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2852041.
---------------------------------------------------------------------------

    There are other manipulations, which the data from the Proposals
would help regulators identify. For example, one theoretical study
suggests that if managers' decision-making is influenced by shifts in
stock prices, then short sellers could potentially negatively affect
managerial decisions by depressing stock prices when profitable
projects are announced, which may lead managers to believe that their
project is not good and to abandon it. \252\ Doing so may lead to worse
managerial decision making and lower stock prices. Another theoretical
study argues that due to high levels of leverage and interconnectedness
in the finance industry, if short sellers are successful at causing
even small declines in stock price, then this can ripple through the
financial system with large effects. \253\ While the Commission notes
that there is currently no empirical evidence that these types of
manipulation occur or are widespread, should they be suspected, these
types of manipulation could better be identified with the positions and
activity data. The positions data would allow the Commission to quickly
identify individuals with large short positions and then use the
activity and CAT data to investigate their trading behavior to look for
signs of manipulation. Improved detection capacity may also lead to
decreased fraud as would be manipulators choose not to engage in
manipulative behavior due to increased fear of detection.\254\
---------------------------------------------------------------------------

    \252\ See I. Goldstein and A. Guembel, Manipulation and the
Allocational Role of Prices, 75 (1) The Rev. of Econ. Studies 133-
164 (2008).
    \253\ See Markus K. Brunnermeier and Martin Oehmke, Predatory
Short Selling, 18 (6) Rev. of Fin. 2153-2195 (2014). Similarly, some
have also asserted that short sellers may have played a role in the
stock market crash at the beginning of the Great Depression. See,
e.g., Jonathan R. Macey, Mark Mitchell, and Jeffry Netter,
Restrictions on Short Sales: An Analysis of the Uptick Rule and its
Role in View of the October 1987 Stock Market Crash, 74 Cornell L.
Rev. 799, 801-802 (1989) (collecting reports of such allegations).
    \254\ See letters from Christine Lambrechts (hereafter
``Lambrechts Letter''), available at https://www.sec.gov/comments/4-627/4627-14.htm; see also International Association of Small Broker
Dealers and Advisor, available at https://www.sec.gov/comments/4-627/4627-109.pdf. See NIRI Letter, available at https://www.sec.gov/comments/4-627/4627-134.pdf.
---------------------------------------------------------------------------

    Publicly releasing aggregated information about large short
positions may, in some instances, increase the risk of trading behavior
harmful to short sellers, namely short squeezes, though the
Commission's improved detection of such potential manipulation could
help deter it. The Commission estimates that 32% of stocks reported on
Proposed Form SHO would only have one Manager above the reporting
Threshold A.\255\ If market participants can ascertain which positions
belong to only one Manager,\256\ then market participants may seek to
orchestrate a short squeeze targeting that particular manager.
Mitigating this risk is the fact that the data provided by Proposed
Rule 13f-2, Proposed Form SHO and the Proposal to Amend CAT,
particularly the activity data provided in Proposed Form SHO may allow
the Commission to more quickly determine if a short squeeze occurred.
The Commission could correlate buy-to-cover activity in Proposed Form
SHO with price increases to look for signs of a squeeze. If it appears
that a short squeeze may have occurred, the Commission could perform
further analysis using the information in the Proposal to Amend CAT to
attempt to determine the market participants involved in the
squeeze.\257\ Increased risk of detection may deter some market
participants from seeking to orchestrate a short squeeze. The Reporting
Threshold, aggregating the data by security prior to releasing it to
the public, and the delay in releasing the data to the public are all
designed to help mitigate this effect. Only Managers whose positions
surpass the threshold would be required to report--limiting the number
of Managers whose information would be aggregated and made public.
---------------------------------------------------------------------------

    \255\ Based on analysis of Form SH data. See supra note 80 (for
information on the methodology and caveats of using Form SH data).
    \256\ In many cases identifying which publicly released reports
had only one Manager reporting may not be difficult. For example, if
the total short positions reported in security with a market
capitalization greater than $400 Million (where the $10 Million
dollar threshold is hit before the percent of shares outstanding
threshold) are less than $20 million then market participants may be
able to reasonably presume that there is only one Manager reporting
a position.
    \257\ Identifying the market participants involved in fraud
solely from CAT data is currently difficult, but would become less
so when the CAIS system becomes fully operational.
---------------------------------------------------------------------------

    Despite not releasing Managers' identities to the public, the
nature and the position size thresholds that underlie publicly released
information may lead to the risk of Managers being identified by the
public. Focusing on stocks in which market participants can ascertain
that only one Manager filed, combined with a Manager's posts on social
media, or other means, such as information discovered by a private
investigator, market participants may be able to identify which Manager
holds

the short position.\258\ As such, the limited number of reporters
potentially risks shining a spotlight on the few managers with large
short positions. However, the delay before publicly releasing the data
means that the information would not be as fresh and thus may not as
accurately reflect current short positions.\259\ Thus, if market
participants sought to orchestrate a short squeeze based on the
aggregated information made public based on the Proposed Form SHO data
that the squeeze could fail if the short positions that are the target
of the squeeze no longer exist. This may reduce the likelihood that
market participants seek to orchestrate squeezes based on the publicly
released Proposed Form SHO data which may help protect short sellers
who maintain short positions for a longer horizon and thus may still
hold the positions reported on the aggregated Proposed Form SHO data.
Based on analysis using Form SH data, the Commission expects that most,
but not all, of the short positions leading to reporting on Proposed
Form SHO would be closed by the time that the aggregated Proposed Form
SHO data is released.\260\
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    \258\ For example, one issuer, upon learning that short sellers
had taken a large short position in the issuer, reportedly sent a
letter to all shareholders urging them to request physical custody
of their shares from their broker-dealers in an apparent attempt to
disrupt securities lending which supports short selling. This
strategy appeared to work initially as the share price increased by
nearly 50% in the subsequent three weeks. The issuer also hired
private investigators to determine who was behind the short selling
and filed suit against a well-known short seller. The issuer,
however, entered bankruptcy less than a year later. The bankruptcy
courts ruled that the issuer defrauded investors. See G. Weiss, The
Secret World of Short-Sellers, Business Week, 62a (August 5, 1996).
See also Owen A. Lamont, Go Down Fighting: Short Sellers vs. Firms,
2 (1) The Rev. of Asset Pricing Studies 1-30 (2012).
    \259\ Analysis of Form SH data found that short positions were
held at or above the $10 million or 2.5% thresholds only for an
average of 9.85 days after the end of each month. See note 80 (for
information on the methodology and caveats of using Form SH data).
    \260\ See infra note 265 (for a discussion on the Commission's
estimates on how long Managers hold short positions). See also infra
note 269 (for more information on short sellers that do hold their
positions for long periods of time).
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    Having detailed information about which Managers currently hold
large and unhedged short positions may also help the Commission observe
potential systemic risk concerns regarding short selling. Large and
concentrated short positions have the potential to increase systemic
risk. As discussed previously, unlike a long transaction, short selling
places an investor at risk of losing significantly more than their
initial investment should the value of the underlying asset increase
significantly. Even temporary spikes in asset value can lead to
significant losses--by triggering margin calls or even positon
liquidations if capital requirements cannot be met.\261\ If the value
of an underlying asset increases, a short seller may be required to
post additional collateral to meet margin requirements. If the investor
is unable to do so, then the investor's broker-dealer may liquidate the
investor's position with existing collateral leading to steep losses
for the short seller. Consequently, it may be more difficult for a
short seller to ride out periods of turbulence than a long seller.
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    \261\ Due to imperfect information and market frictions, a short
seller who ``does not have access to additional capital when
security prices diverge . . . may be forced to prematurely unwind
the position and incur a loss[.]'' See, e.g., Mark Mitchell, Todd
Pulvino, and Erik Stafford, Limited Arbitrage in Equity Markets, 57
(2) The J. of Fin. 551-584 (2002). See also, e.g., Andrei Shleifer
and Robert W. Vishny, The Limits of Arbitrage, 52 (1) The J. of Fin.
35-55 (1997) and Denis Gromb and Dimitri Vayanos, Limits of
Arbitrage, 2 (1) Annu. Rev. Fin. Econ. 251-275 (2010) (citations
therein).
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    Manager level short position data of individuals with large short
positions could allow the Commission to better observe these positions
and more appropriately respond to any market events that arise. For
example, in the context of the meme stock phenomenon in January 2021,
if the Commission had the Proposed Form SHO data at the time then it
would have had a clearer view as to which Managers held large short
positions prior to the volatility event and thus which Managers were at
greatest risk of suffering significant harm from a short squeeze.
    All the effects, positive and negative, associated with the data
collected by Proposed Rule 13f-2 discussed in this section would be
limited by several factors. First, upon filing Proposed Form SHO would
be checked for technical errors but not for the accuracy of the
position and activity data in the Form. If Managers make mistakes in
their calculations, such mistakes would reduce the utility of the data.
However, the amendment process would require Managers to amend filings
when they discover errors, thus promoting the accuracy of the
information. The Commission also recognizes that there are limitations
to Proposed Rule 205. For example, broker-dealers would be required to
mark transactions as buy to cover based only on information that they
currently have access to and they would not be required to net such
activity across the same customer's accounts at that broker-dealer.
This may miss some buy to cover trades that may occur if a Manager uses
a broker to execute transactions and a prime broker (or prime brokers)
to manage positions. In this case, the broker-dealer managing the
purchase of shares would not necessarily know that the buy is actually
a buy to cover and would thus not mark the trade as such. The current
proposal may also miss transactions that may occur if a Manager uses
multiple accounts at the same broker-dealer to trade.
2. Effects on Stock Price Efficiency
    The Commission believes that the Proposals may have uncertain
effects on stock price efficiency.\262\ The uncertain effects on price
efficiency come because increased transparency generally increases
efficiency whereas increased transparency could also discourage
investors from gathering information--which harms price efficiency.
This section discusses both the concept of price efficiency and the
positive and negative impacts that the Proposals may have on price
efficiency.
---------------------------------------------------------------------------

    \262\ See infra Part VIII.E.1 (for additional discussion of the
effect of the Proposals on efficiency).
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    The publicly released aggregated data from Proposed Form SHO would
provide new information to market participants about the aggregate
activities of some short sellers--with a planned lag of approximately
fourteen days from the end of the filing deadline.\263\ Existing short
selling data, such as the FINRA short interest data, is timelier than
the potential data from the Proposed Rule 13f-2 and Proposed Form SHO,
and it includes short interest for all short sales known to clearing
broker-dealers but does not provide the Commission or the public daily
information about short sellers' activities.
---------------------------------------------------------------------------

    \263\ See supra Part III.C (for more information on the delay of
public dissemination of Proposed Form SHO data).
---------------------------------------------------------------------------

    There is likely significant overlap between the information about
stock fundamentals contained in FINRA short interest data and in the
data that would be aggregated from Proposed Form SHO filings. However,
the information in Proposed Form SHO filings focuses on Managers and
indicates whether positions are fully or partially hedged, and provides
daily net changes in positions. Thus, the Proposed Rule 13f-2 and
Proposed Form SHO would increase the information available to investors
about bearish sentiment in the market. For example, the information on
the proportion of short interest made up of Managers with substantial
positions, how much of those positions are fully or partially hedged,
and the activity information would allow market

participants an enhanced view of short interest and provide insight on
changes in short interest between short interest reports. Further, the
use of the last settlement day of the month as the reference month for
the Proposed Form SHO reports would allow for a direct comparison of
the Proposed Form SHO data to the FINRA short interest data. With FINRA
short interest as a reference point, the activity data may then provide
insight to market participants about changes in total short interest
from FINRA short interest report to FINRA short interest report. For
example, market participants could potentially use the data on
positions' changes to correlate periods of significant increases or
decreases in short positions with corporate events or announcements to
gather a more precise view of how the market views corporate actions or
events and which events contributed to the final short interest tally
at the end of the month.
    Increased information may increase price efficiency. As such, the
proposed publication of the aggregated Proposed Form SHO data
represents new information that market participants could use to value
stocks--increasing stock price efficiency. Price efficiency (also known
as market efficiency) refers to how accurately prices reflect available
information relevant to the value of the asset.\264\ For example, this
information may allow market participants to more effectively make
trading decisions and manage risk--increasing price efficiency.
Although, the majority of Managers' short positions would be closed by
the time the aggregated data from Proposed Form SHO would be made
public due to the lag in reporting and public dissemination, a portion
of the short positions would still be open.\265\ While the market
reacts to unexpected short interest changes,\266\ the ability to
understand short interest and short interest changes should be additive
information that would be reflected in prices upon publication.
However, the increase in price efficiency from the publication of
aggregated Proposed Form SHO data is likely to be limited due to the
delay in publication.
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    \264\ See, e.g., Eugene Fama, Efficient Capital Markets II,
46(5) J. Fin. 1575-1617 (1991).
    \265\ The Commission estimates that the median number of days
that the short position is held above the threshold after the end of
the month is 0, while the average number of days that a short
positon is held above the threshold is 9.85 (suggesting that the
majority of positions will be closed. Some are held longer than the
delay in reporting).
    \266\ See, e.g., A. Senchack and L. Starks, Short-Sale
Restrictions and Market Reaction to Short-Interest Announcements, J.
of Fin. and Quantitative Analysis 177-194 (1993).
---------------------------------------------------------------------------

    The Proposals may also improve price efficiency if they mitigate
fraud as discussed in Part VIII.D.1. Fraud is inherently non-efficient
trading and harms price efficiency because a fraudster's motive is to
create a deviation of a firm's value from fundamentals and to profit
from this deviation. Thus, to the extent that fraudulent trading, such
as short and distort campaigns, are limited by regulator's access to
the data provided by Proposed Form SHO, the Proposed Rule 13f-2 would
result in improved price efficiency.
    On the other hand, Proposed Rule 13f-2 may harm price efficiency by
increasing the cost of short selling. Academic studies, both
theoretical and empirical, have shown that when short selling becomes
more costly, stock prices are less reflective of fundamental
information both because costly short selling makes trading on
information difficult, and because costly short selling dissuades
investors from collecting information in the first place.\267\
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    \267\ See, e.g., supra note 242. See Dixon (2021). See Edward
Miller, Risk, Uncertainty, and Divergence of Opinion, 32 (4) The J.
of Fin. (1977). See Robert F. Stambaugh, Jianfeng Yu, and Yu Yuan,
The Short of It: Investor Sentiment and Anomalies, 104 (2) J. of
Fin. Econ. 288-302 (2012).
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    Proposed Rule 13f-2 affects the value of short selling in four
ways: Compliance costs, revealing short sellers' information,
potentially revealing short sellers trading strategies, and increasing
the threat of retaliation. First, the compliance costs associated with
reporting large short positions are a direct increase in the cost of
short selling.\268\ As many Managers have underlying investors, these
costs would likely be passed on to end consumers in the form of lower
returns due to limiting the strategies that Managers could profitably
employ.
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    \268\ See infra Part VIII.E.2 (for a discussion of how these
direct costs may affect investors in funds that employ short
selling).
---------------------------------------------------------------------------

    Second, publicly releasing the aggregated Proposed Form SHO data
has the potential to reveal some of the information that short sellers
may have acquired through fundamental research. Revealing this
information to the market may cause prices to adjust to the information
that the short seller uncovered before the short seller is able to
acquire their full desired position--decreasing the profits to
acquiring the information and providing less incentive to produce
fundamental research. Thus, the publication of Proposed Form SHO data
represents an additional cost to short selling in the form of
potentially lower profitability for trading on negative information.
That the data is aggregated and released on a lag mitigates this cost
somewhat but does not eliminate it. To avoid price impacts, a short
seller seeking to build a sizeable position in a firm generally does so
by building up small positions over time until the desired position is
accumulated.\269\ Because short positions can take a long time to
accumulate even with a lag the information motivating the trades being
reported may not be stale. While aggregation limits the precision with
which markets can estimate an individual short seller's motivation, it
does not eliminate it.\270\ Additionally, the threshold may protect
short sellers with smaller short positions from having the information
in their trades revealed. In contrast, the Proposed Rule 13f-2 may
highlight very large positions potentially increasing the likelihood
that some of the information contained in the trades of large short
sellers would be acted on by other market participants before the short
seller could acquire their optimal position. Thus, the Commission
expects that publication of aggregated Proposed Form SHO data would
still represent a cost to short selling.\271\ Relatedly, Managers who
build short positions that exceed the threshold may choose to

execute the positions that are beyond the threshold at a pace that is
faster than what they would have done otherwise to attempt to build
their optimal position before information is disclosed and copy-cat
investors are able to trade based on the reported data. Executing
transactions at a faster speed than would be optimal imposes increased
transaction costs on Managers than they would have incurred
otherwise.\272\ Additionally, trading faster than is optimal may harm
price efficiency by leading prices to over-react to the aggressive
trading.\273\
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    \269\ See Albert S. Kyle, Continuous Auctions and Insider
Trading, Econometrica: J. of the Econometric Society 1315-1335
(1985). See Kirilenko, Andrei, Albert S. Kyle, Mehrdad Samadi, and
Tugkan Tuzun, The Flash Crash: High[hyphen]Frequency Trading in an
Electronic Market, 72 (3) The J. of Fin. 967-998 (2017) (for a
discussion of this type of trading); Amir E. Khandani and Andrew W.
Lo., What Happened to the Quants in August 2007? Evidence from
Factors and Transactions Data, 14 (1) J. of Fin. Markets, 1-46
(2011) (for a discussion of what happens when investors build large
positions without properly smoothing their trading). Well-known
short seller Gabe Plotkin testified that his firm had built and
maintained a short position in GameStop for over 5 years prior to
the significant volatility experienced in January 2021. See Game
Stopped? Who Wins and Loses When Short Sellers, Social Media, and
Retail Investors Collide (Hearing), U.S. House of Representatives
Committee Repository (``Game Stopped Hearing''), available at
https://docs.house.gov/Committee/Calendar/ByEvent.aspx?EventID=111207; See also Juliet Chung and Melvin
Capital Says It Was Short GameStop Since 2014, Wall Street Journal
(Feb 17, 2021). In the Form SH data, 25% of positions were held
above the proposed Threshold A for at least a month. See supra note
80.
    \270\ See supra Part VIII.D.1 (for a discussion of how market
participants may be able to uncover individual identities).
    \271\ Consistent with this expectation, research on similar
regulations in Europe has documented a similar effect there. See
Market Impact of Short Sale Position Disclosures, Copenhagen
Economics: Office of Global Research and Markets at the MFA,
available at https://www.copenhageneconomics.com/publications/publication/market-impact-of-short-sale-position-disclosures.
    \272\ See supra note 269; see also Kyle (1985).
    \273\ See, e.g., Albert S. Kyle and Anna A. Obizhaeva, Large
Bets and Stock Market Crashes (March 22, 2019), available at https://ssrn.com/abstract=2023776 or https://dx.doi.org/10.2139/ssrn.2023776.
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    Third, the Proposed Form SHO data may provide information about the
specific trading strategies of certain short sellers. For example, in
the case where there is only one filer and market participants know