The Long and Short of It
Eileen Gannon, Vice President of Communications and Investor Relations at Workiva, and a member of the editorial advisory board for the National Investor Relations Institute (NIRI), explains the impact of short trading reporting practices. Companies in industry sectors (such as technology, pharmaceutical, and biotechnology), with lengthy product development cycles before becoming profitable, are particularly vulnerable to short-selling abuses.
There is a growing consensus among companies that the SEC should mandate the public disclosure of short positions. The suggested NIRI-NYSE rulemaking petition would have a positive impact on investors and issuers by increasing the transparency around short sales and improving both party's ability to evaluate the market and movements in particular stock.
Many investors who engage in short selling do not want to report their investment activity because they want to protect proprietary trading strategies. While that’s understandable, disclosure advocates point out that investors would not have to report their positions until after the close of the calendar quarter. Advances in software technology have the ability to level the playing field by automating that reporting. Additional disclosures would not only be less burdensome, but ultimately benefit investors and issuers.
Betting that a company’s stock price will decline by selling stock “short” is a trading strategy popular since the early 17th century. Short sellers have been implicated in nearly every bear market since then. But that doesn’t make them all bad. In fact, short selling is essential to keeping public markets running today. Market makers (including specialists) and block positioners can use short interest to offset temporary imbalances in the bid and ask for securities, thereby providing essential market liquidity and price efficiency.
The critical role that short selling plays in public markets is also why NIRI, the NYSE Group, Nasdaq, and a growing number of companies want short interests to start publicly disclosing their investment positions.
In 1975, the Securities Exchange Act of 1934 was amended to include Section 13(f), which mandated that long equity ownership must be reported within 45 days after the close of the calendar quarter. The statutory provision remains intact after all these years, although the Dodd-Frank Act amended it slightly in 2010. However, short-selling investors who endeavor to sell high and buy low (in that order) do not have to follow the same disclosure rules as long-position holders.
“Shorting can add to efficient markets, but short sellers should have the same reporting requirements as long investors,” says Derek Cole, president of Investor Relations Advisory Solutions, and a former chairman of NIRI’s Board of Directors.
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