The market and regulatory reaction to the GameStop controversy is narrowing down to one topic: disclosure of short selling.
That’s evident in the witness list announced for the U.S. House Financial Services Committee hearing on the matter scheduled for Thursday, Feb. 18. The CEOs of RobinhoodMarkets, Citadel, Melvin Capital Management and Reddit are all expected to testify. Reddit, of course, is the venue where members of the “WallStreetBets” message board discussed buying GameStop stock which, in turn, drove up the price. RobinhoodMarkets is the trading venue that halted GameStop trading after the price rose sharply in late January.
The stated title for Thursday’s hearing, “Game Stopped? Who Wins and Loses When Short Sellers, Social Media and Retail Investors Collide,” points to questions about the communications and retail market structure issues raised by the GameStop spike, but it’s unclear whether the committee will get to the underlying issues about hedge fund disclosure. Currently, the SEC requires funds with market holdings of over $100 million to disclose information on their holdings, including short selling, in Form 13F, quarterly.
Years ago, the US Dodd-Frank Act ordered the SEC to study real-time disclosure of shorting, and the SEC concluded in 2014 that requiring this disclosure would not be worth the effort. Also, in 2015, the NYSE lobbied the SEC to require hedge funds to reveal short positions, to no avail.
Citron Research, another short seller that also suffered losses from the GameStop stock’s rise, has decided not to publish its short research anymore and to focus on long opportunities instead. If more short sellers follow its lead, the flow of data about shorting activity could dry up.
So, the action that financial data managers should watch for is whether either market participants or regulators are going to try to clamp down on short disclosure, especially in real time. The rationale for that is to prevent artificial inflation of a stock’s value from occurring again. However, regulators could decide that ensuring a free market means information must flow freely. Outside the US, other regulators, notably in Europe require disclosure of information on shorts on a more frequent basis.
Meanwhile, because Congress is spending time on the GameStop issue, the confirmation of Gary Gensler as SEC chair will likely be delayed into March. Commissioner and current acting chair Allison Lee was seen as favoring tougher oversight of markets when she was said to be a candidate for chair. Gensler is said to be pragmatic and moderate, weighing the interests of both Wall Street and investor advocates. Whatever change happens to short-selling disclosure requirements will likely be incremental or gradual rather than extreme.