I would like to comment on two particular components of 21-19. -"It is possible that the public dissemination of more granular data could discourage short-selling activity, which is an important mechanism for both efficient pricing and for liquidity provision. We also request comment on potential negative outcomes of making this information publicly available on an aggregated basis." -"Would information on the portion of total short interest that is fully or partially hedged be useful to market participants? Is this information also ascertainable by members with respect to customer short positions? What factors would impact a member’s ability to determine with certainty whether a short position is fully or partially hedged and report this information to FINRA?" A: if a position is a sum of its components relevant to the net effect of any gain or loss, then a hedge and its corresponding short are two components of the same position. Just as information of a position can add transparency to the market, partial information leaves room for deliberate manipulation of the competition. Entities with significant short exposure could easily lure investors and competing funds in and out of trades that would be beneficial for them, by hiding the other half of that position. Therefore, any entity by existing or new gauge who can have significant effect on a security's value by hiding a short position or a hedge should be required to disclose ALL aspects of their short position and corresponding hedge. This is in line with the agreed upon value of shorting as a mechanism, which is supposedly fair price discovery, and not waging war on investors. It is the only situation in which short-selling as a mechanism consists only of fair bets; though it discourage some legitimate short selling, it discourages far more illegitimate and malicious short selling. "When a customer closes-out a short position by delivering shares borrowed from a member’s affiliate, the customer acquires an obligation to deliver shares to the affiliate in the future. The exposure from this loan obligation is substantially equivalent to a short position but the loan obligation is not a reportable short position under the current version of Rule 4560. If customers can close out short positions by borrowing shares from unaffiliated lenders, those loan obligations would have the same economic equivalence to reportable short positions. We request comment below on whether firms have such programs." A: Though FINRA requests comment on whether firms have such positions, labeling and defining this mechanism indicates that FINRA clearly knows these programs exist or can exist temporarily under current regulation. If it is important to market structure and fairness that short positions be reported at all, it is important to the exact same degree that all instruments of synthetic shorting in name or effect be reported with the same standards. Thus there should be no difference between the mandatory nature of reporting short positions and reporting effectively short Arranged Financing loans. Asking whether firms have these positions or not is irrelevant, as the only reasonable action is enforcing the accurate and timely reporting of these agreements with the same prudence as short positions. Additionally, if there are regulations defining maximum short positions per security, firm, account, or broker-dealer, regulations must ensure that Arranged Finance loans are mechanically unable to temporarily or permanently extend an aggregate effective short position beyond those defined maximums. In summary, Arranged Finance loans are SI-reporting defeat devices; a direct manipulation of SI data, and malicious intent to evade the spirit of the law.
Bryan Thecrab Comment On Regulatory Notice 21-19
I would like to comment on two particular components of 21-19. -"It is possible that the public dissemination of more granular data could discourage short-selling activity, which is an important mechanism for both efficient pricing and for liquidity provision. We also request comment on potential negative outcomes of making this information publicly available on an aggregated basis." -"Would information on the portion of total short interest that is fully or partially hedged be useful to market participants? Is this information also ascertainable by members with respect to customer short positions? What factors would impact a member’s ability to determine with certainty whether a short position is fully or partially hedged and report this information to FINRA?" A: if a position is a sum of its components relevant to the net effect of any gain or loss, then a hedge and its corresponding short are two components of the same position. Just as information of a position can add transparency to the market, partial information leaves room for deliberate manipulation of the competition. Entities with significant short exposure could easily lure investors and competing funds in and out of trades that would be beneficial for them, by hiding the other half of that position. Therefore, any entity by existing or new gauge who can have significant effect on a security's value by hiding a short position or a hedge should be required to disclose ALL aspects of their short position and corresponding hedge. This is in line with the agreed upon value of shorting as a mechanism, which is supposedly fair price discovery, and not waging war on investors. It is the only situation in which short-selling as a mechanism consists only of fair bets; though it discourage some legitimate short selling, it discourages far more illegitimate and malicious short selling. "When a customer closes-out a short position by delivering shares borrowed from a member’s affiliate, the customer acquires an obligation to deliver shares to the affiliate in the future. The exposure from this loan obligation is substantially equivalent to a short position but the loan obligation is not a reportable short position under the current version of Rule 4560. If customers can close out short positions by borrowing shares from unaffiliated lenders, those loan obligations would have the same economic equivalence to reportable short positions. We request comment below on whether firms have such programs." A: Though FINRA requests comment on whether firms have such positions, labeling and defining this mechanism indicates that FINRA clearly knows these programs exist or can exist temporarily under current regulation. If it is important to market structure and fairness that short positions be reported at all, it is important to the exact same degree that all instruments of synthetic shorting in name or effect be reported with the same standards. Thus there should be no difference between the mandatory nature of reporting short positions and reporting effectively short Arranged Financing loans. Asking whether firms have these positions or not is irrelevant, as the only reasonable action is enforcing the accurate and timely reporting of these agreements with the same prudence as short positions. Additionally, if there are regulations defining maximum short positions per security, firm, account, or broker-dealer, regulations must ensure that Arranged Finance loans are mechanically unable to temporarily or permanently extend an aggregate effective short position beyond those defined maximums. In summary, Arranged Finance loans are SI-reporting defeat devices; a direct manipulation of SI data, and malicious intent to evade the spirit of the law.