Keeping tabs on short sells

Looking through the EP adopted text of MiFIR, I am surprised to see that transaction reporting obligations include a designation to identify a short sell, as defined in the newly introduced short selling regulation. I thought the regulator had done with that!

Principal business sellers would need to dynamically track their inventory across all business lines to determine if they own the shares at the time of entering into a trade. So even with firms given until the close of the following business day to report a transaction, gathering all the data and applying it to individual transactions would take some effort and then there’s the time required to submit the transactions to an ARM and on to the regulatory body.

For agency business it’s perhaps simpler at first, because the seller does not own the shares or debt at the time of agreeing to the sale. The broker would need to receive the new designation from the buy-side and pass it on to his transaction reporting system. However, as described above, the buy-side might not even know if it’s a short sell, or at least not at the time of sending the original parent order to the executing broker.

MiFIR seeks to supplement transaction reports on a number of fronts in the name of improved market monitoring, but will this proposed extra tab on short sells only add to the confusion? Levels of net short positions are already monitored via the new EU harmonised disclosure rules. Is this supplementary information useful? Any added benefit from tracking on a transaction-by-transaction basis is not clear. Market makers that constantly fluctuate between net short and net long positions might report 50% of their transactions as short sells and still have net long positions at the end of the day. Or will they be exempt from populating this new reporting flag? What are the regulators trying to achieve here – more costs and complexity for practitioners?

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