NYSE Pleads for Rules to Make Hedge Funds Reveal Short Positions

Photographer: John Taggart/Bloomberg
  • U.S. lags behind Europe where funds must publish their shorts
  • The biggest hedge funds pay brokers to estimate short interest

The New York Stock Exchange is prodding its regulator to make hedge funds reveal which stocks they’re shorting, an area where the U.S. lags far behind Europe.

NYSE wants the Securities and Exchange Commission to compel investors to identify the stocks they are betting will fall. The U.S. lacks such rules, leaving it behind the European Union, which obliges funds to publish short positions once they reach 0.5 percent of a company’s share capital.

In a letter dated Oct. 7, NYSE, a division of Intercontinental Exchange Inc., calls for the SEC to “bring light to a less transparent and increasingly consequential corner of the securities market.”

While big funds pay their brokers to compile up-to-date short-selling data, everyone else has to wait up to two weeks for the stock exchanges to publish the official tally of how much of a company’s shares are out on loan. The SEC forces hedge funds to report their long positions periodically, but it has no such rule for their short positions.

Over in Europe, financial regulators imposed a disclosure requirement on hedge funds as part of their response to the financial crisis. Since 2012, hedge funds have had to report short positions of as little as 0.2 percent in European stocks to their national regulator. When the position reaches 0.5 percent, they have to tell everyone.

Faster disclosure may encourage copycat investing, according to David Tawil, a founder of Maglan Capital, an $80 million hedge fund in New York.

"Being a fund manager and an investor, you don’t want to give away all of that information so readily, because that’s what makes your investment fund unique," he said. "If everyone knows what my positions are, then they can go ahead and essentially mimic them."

Hedge funds with more than $100 million in assets are required to report their holdings to the SEC within 45 days of the end of each calendar quarter. NYSE’s letter -- written with the National Investor Relations Institute -- said, “it is past time for the Commission to require short-position reporting at least to the same extent of long-position reporting.”

The first meeting of a committee of firms listed on NYSE, called the Listed Company Advisory Board, discussed the lack of transparency on short positions at length, according to a letter that NYSE President Tom Farley sent to customers about the exchange’s SEC proposal. 

"There was a clear consensus among that group that more transparency would be helpful," Farley wrote.

Long positions should be reported in a more timely and frequent manner, NIRI CEO Jim Cudahy said in an e-mailed statement. "Those investors with short positions in a security should answer to the same standard."

The proportion of a company’s shares that are out on loan -- often called the short interest -- is a good predictor of returns. Short interest in S&P 500 stocks has increased since the summer. Some 3 percent of the equity benchmark’s shares were outstanding as of October 20, near the highest level since June 2012, according to Markit data. The average short interest over the last years is 2.1 percent.

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