Practices that enable short-selling could become more transparent under a new SEC rule in response to GameStop mania

• The SEC proposed a new rule that would make short selling more transparent
• The rule requires lenders to report transactions within 15 minutes to a governing body, like FINRA.
• Short selling came under scrutiny earlier this year after retail traders drove the price of GameStop higher.

Regulators want to make the practices behind shorting stock more transparent under a new rule crafted in response to the GameStop short squeeze in January. 

On Thursday, the US Securities and Exchange Commission proposed a new regulation that would “provide transparency in the securities lending market,” a market that SEC Chair Gary Gensler said is currently opaque.

Short selling is a bet that a company’s shares will decline. To do it, an investor borrows shares from a counterparty willing to lend, and then sells them. If the stock falls, as hoped, the investor buys the shares back and returns the shares, pocketing the difference. 

The new rule requires firms lending securities to report the “material terms” of each loan to a governing body like the Financial Industry Regulatory Authority within 15 minutes of the transaction. That information would then be made public. 

“This proposal would bring securities lending out of the dark,” Gensler said. The public has 30 days to comment on the proposal. 

In January, short-selling came under scrutiny when hordes of retail traders loosely organized on Reddit to drive up the share price of meme stocks, GameStop included. The video-game retailer was shorted more than 100%, according to Reuters, meaning more shares were shorted than were available to trade. Retail traders noticed, and aimed to create what they called a “MOASS,” or the mother of all short squeezes, to cause short-sellers to take losses on their bets. 

In its statement, the SEC said its new rule is in line with the Dodd-Frank Act, legislation that was passed following the 2008 market crash. The SEC’s rule ensures “market participants, the public, and regulators have access to timely and comprehensive information about the market for securities lending.”