New Law Could Put Big Short Sellers on the Endangered Species List

A new law introduced in Congress could mean the end of some major short sellers. According to a report that broke this morning on TheStreet, the law would require disclosure of short positions by large investors.

Today, big investors like hedge funds have to disclose the stocks they own quarterly. But they can keep secret any short position they have, no matter how large.


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If the bill passes, those days are over. From TheStreet:

The Short Sale Transparency and Market Fairness Act will modify the reporting requirements applicable to certain institutional investment managers who have more than $100 million in assets under custody and who are required to file ownership reports with the SEC. Key modifications include:

1 Reducing the reporting window from 45 days to 10 days after the end of each month for such asset managers.
2 Expanding such reports to require reporting of direct or indirect derivative positions or interests (including short positions).

This could make it dangerous for hedge funds to heavily short a stock. Soon, everyone would know about their position.

That means other hedge funds could buy the same stock to engineer a short squeeze. They may be joined by retail investors, as was the case in shares of GameStop Corp. and AMC Entertainment Holdings Inc. last year.

A short squeeze can cause catastrophic losses for a hedge fund, as in the case of Melvin Capital.

The new law could also make naked short selling more difficult. This generally illegal practice involves selling short shares without borrowing them first.

I’ve long suspected naked shorting in shares of meme stocks like AMC and GameStop, along with many other investors.

But what if regulators or the public could count up the amount of short positions out there? If big investors have far more shares short than exist, it would be strong evidence of naked short selling.

In all, I think this bill would be a very positive change for markets. If investors have a right to know about long positions held by big institutions, why not short positions?

What’s more, in a future financial crisis, knowing who shorted what could be critical. A huge short position that blows up could push an institution to insolvency, perhaps dragging others with it.

We don’t know yet whether the bill will pass or what final form it might take. But here’s hoping Congress acts to make markets safer, fairer, and more transparent.

What do you think about the new bill? Leave a comment at the bottom and let me know!

More on markets:

AMC Fails to Deliver Pass 2.6 Million in New Report

Hedge Fund Tiger Global Losing $136 Million a Day, Down 52%

$6B Hedge Fund Cut Off from Trading As Investigation Looms

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Photo: “U.S. Capitol building” by Gage Skidmore is licensed under CC BY-SA 2.0.

6 thoughts on “New Law Could Put Big Short Sellers on the Endangered Species List”

  1. 1st, Generally illegal? It’s just plain illegal. 2nd, congress is proposing this bill to force these hedge funds to contribute to their campaign to not get it to pass. It will not pass because it’s in the best interest of the people.

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