By Thornton McEnery

New rule by Gensler seeks to bring more market data out of dark corners and into the light

Gary Gensler has been circling short-sellers for months, and now the Securities and Exchange Commission chief is looking to make a big move.

Under a new rule proposed by the SEC Friday morning, some investors would be required to report their short sale-related activity to the SEC on a monthly basis, allowing the commission to make detailed short-selling data available to the public for the first time.

"Today, the Commission unanimously voted to propose rules and amendments to broaden the scope of short sale-related data available to the investing public and to regulators," Gensler said in a statement. "If adopted, it would strengthen transparency of an important area of our markets that would benefit from greater visibility and oversight."

Since taking the reins at SEC, Gensler has made market transparency a key goal, and short-selling has been a major area of discussion, including after the wild short squeeze that took hold in January 2021 on meme stocks like $GameStop(GME.US)$ and $AMC Entertainment(AMC.US)$.

The fallout from the short squeeze resulted in a Congressional hearing and an SEC investigation. While the probe did not find any actual malfeasance, Gensler has been hinting that he still was monitoring short-sellers. In February, Bloomberg News reported on a sweeping Department of Justice probe of at least 30 short-selling firms and allies.

Retail investors have complained that more shares are being shorted than are available to trade, while keeping alive online discussions claiming market manipulation, potential fraud by short-sellers and the lack of data publicly available around short-seller trading activity.

Under current rules, firms are required to report short interest data to the Financial Industry Regulatory Authority twice a month. Critics have said the quality and frequency of that data isn't highly useful.

The SEC's proposed new rule will look to bridge that gap.

While the changes to previously proposed SEC rules have been common, as written Rule 13f-2, would only apply to institutional investment managers that hold "a short position of at least $10 million or the equivalent of 2.5 percent or more of the total shares outstanding" in an individual security, meaning that the SEC would be able to see and share the biggest short sales of individual stocks and aggregate them, providing investors with granular data on those shorts.

Firms also would have two weeks into every month to disclose, giving essentially a detailed 6-week lookback at big short moves and give a much clearer, if month-old, picture of short interest on stocks.

The rule, as designed, would increase disclosure of what is known as "buy-to-cover," essentially when a trader initiates a buy trade to close their short position on borrowed shares, something that short-selling critics likely will welcome as it would aim to further curb so-called "naked shorting," a practice the SEC mostly outlawed in the wake of the 2008 global financial crisis for traders using non-existent shares to short stock of public companies.

Overall, the new transparency rule is yet another push by Gensler to bring more market data out of the dark corners and into the light.

As he told MarketWatch in an exclusive interview last week, "Finance is ultimately about trust, and the official sector has a role to help instill that trust through a set of rules on disclosure, anti-fraud and anti-manipulation."

-Thornton McEnery