When Regulation NMS was adopted, the SEC and market observers did not recognize ex-clearing as a significant loophole. In the original crafting of Regulation SHO (implemented in 2005), the industry told the SEC that ex-cleared trades were "rare". As such ex-cleared trades were exempt from much of the short selling regulations. Dark pool trades (ATS and OTC) in 2021 now make up a significant part of daily trading volume. Approximately 40% is traded in these systems each day and it is not unusual to see as much as 70% of volume for some stocks being traded outside of the lit exchanges. Furthermore the average trade size for many stocks in dark pools is less than 100 shares despite these systems being originally intended to facilitate large institutional block trades. 40%+ of daily trade volume being traded off of lit exchanges is not an insignificant number. Ex-clearing trades need to be regulated in greater depth with transparent public reporting. Failures to deliver and/or receive need to be reported and fall under the same Reg SHO rules regardless of whether the trades were made ex-clearing or not. The ex-clearing loophole and the true extent of delivery failures (which become undisclosed liabilities and operational risks) are flaws within the clearance and settlement system that ultimately could create substantial systemic risk throughout the financial system, threatening the actual day-to-day function of the U.S. markets themselves. I request that the FINRA Committee takes these risks seriously. The ex-clearing loophole needs to be fixed with more transparent reporting of short sales across the board urgently required to restore retail investor faith in the U.S. capital markets.
Anonymous-DS Comment On Regulatory Notice 21-19
When Regulation NMS was adopted, the SEC and market observers did not recognize ex-clearing as a significant loophole. In the original crafting of Regulation SHO (implemented in 2005), the industry told the SEC that ex-cleared trades were "rare". As such ex-cleared trades were exempt from much of the short selling regulations. Dark pool trades (ATS and OTC) in 2021 now make up a significant part of daily trading volume. Approximately 40% is traded in these systems each day and it is not unusual to see as much as 70% of volume for some stocks being traded outside of the lit exchanges. Furthermore the average trade size for many stocks in dark pools is less than 100 shares despite these systems being originally intended to facilitate large institutional block trades. 40%+ of daily trade volume being traded off of lit exchanges is not an insignificant number. Ex-clearing trades need to be regulated in greater depth with transparent public reporting. Failures to deliver and/or receive need to be reported and fall under the same Reg SHO rules regardless of whether the trades were made ex-clearing or not. The ex-clearing loophole and the true extent of delivery failures (which become undisclosed liabilities and operational risks) are flaws within the clearance and settlement system that ultimately could create substantial systemic risk throughout the financial system, threatening the actual day-to-day function of the U.S. markets themselves. I request that the FINRA Committee takes these risks seriously. The ex-clearing loophole needs to be fixed with more transparent reporting of short sales across the board urgently required to restore retail investor faith in the U.S. capital markets.