Short story: New real-time trading requirements proposed

There was an article yesterday in the Securities Technology Monitor about an SEC proposal to require real time reporting of short sales to increase timely visibility into the short positions on a given instrument. Today, this data is required to be reported monthly or bi-monthly depending on the exchange. As hedge funds and high-frequency trading have become a dominant part of trading volumes, short positions can vary wildly in a month, and of course, the algorithms know when the reporting windows are and can “window dress” to disguise short percentages.

Real time reporting of short transactions and/or positions would effectively create another feed that provides new information about a given security’s short position, and inevitably becomes a new source of input for algorithms which would be able to monitor net short positions in a way never before available. Either way, this would mean still more real time infrastructure in the middle-office (for capturing and reporting short sales) and the front office (where the new consolidated “short feed” would be consumed). Just another example of the non-stop migration to real time data. Expect more of this. It only makes sense.

As an aside: I will confess that I was surprised by one of the claims of the article, that the SEC says short selling accounted for almost half of US equities volume in the month of June 2010. That was a net down month for the market, but still, it seems hard to believe on the surface. But when you consider that high frequency trading represents on the order of 70% of all trading volume, and hedge funds are responsible for the lion’s share of high frequency trading, it probably shouldn’t be that surprising that shorting would be that prevalent during a market descent. But regardless, if shorting is that prevalent, and the SEC and congress are aiming to put some kind of controls on market manipulation, you can expect that this proposal will eventually pass — sooner than later.