Update on the Cboe Short Sale Volume Data Proposal

Last June, the Cboe filed a proposal with the SEC to introduce a new Short Sale Volume data report on an end-of-day and intraday basis. We were shocked that a major stock exchange would even consider such an information leaking data feed and wrote at the time:

“Why does the Cboe think they should be allowed to leak confidential order information? It’s bad enough that they sell proprietary data feeds which are essentially a DVR recording of your every trading move, but now they want to let paying subscribers know when they have an active short seller. And even worse, they want to distinguish whether or not those short sales are from retail clients.  If allowed to publish this information, the Cboe will be creating an asymmetric information situation where only paying subscribers could benefit.”

It looks like the Cboe must have received some negative feedback and decided to pare back the proposal . In December 2021, the Cboe revised the proposal and seems to have deleted the intraday portion of the report. They now describe it as:

“The Exchange proposes to describe the Short Volume Report as “an end-of-day report that summarizes equity trading activity on the Exchange, including trade count and volume by symbol for buy, sell, sell short, and sell short exempt trades.” Specifically, the end-of-day report will include the following information: trade date, symbol, total volume, buy volume, buy trade count, sell volume, sell trade count, sell short volume, sell short trade count, sell short exempt volume, and sell short exempt trade count.”

Our old eagle-eyed friend, R. T. Leuchtkafer (RTL), picked up on something very important in the revised proposal and wrote a letter to the SEC with his observations. We recommend your read his brilliant 6-page letter but will highlight the main point here:

“The exchanges write that the products will include “trade date, symbol, total volume, buy volume, buy trade count, sell volume, sell trade count, sell short volume, sell short trade count, sell short exempt volume, and sell short exempt trade count.” Trade date, symbol, and total volume are clear enough. But what is the difference between “total volume” and for example “buy volume,” since every trade always includes a buyer?

Does “buy and sell volume” just mean “trade volume”? It’s otherwise senseless. It’s senseless unless, perhaps, what this describes is splitting out buyer and seller-initiated trade volume or total buy and sell order volume.”

The distinction that RTL is pointing out should concern every market participant.  The Cboe apparently wants to sell information that would indicate which participant, the buyer or seller, initiated the trade and whether or not the seller was a short seller or short-exempt seller. Why should an exchange have the ability to sell information about their client’s intentions? Even though the Cboe claims that other exchanges have similar products, this type of information does not seem to currently exist on any other exchange.

RTL then goes on to absolutely savage the intentions of the Cboe and the dereliction of duty by the SEC to even allow such a proposal to be filed. This paragraph absolutely nails it and belongs in the market structure Hall of Fame:

“Step by step, these attempts are how the industry gets its way with the SEC. It plays a long game. The industry starts with what it says is a reasonable proposal and then builds on that over time, using earlier proposals as precedent, until it reaches a goal that may well have seemed impossible at the beginning. By that point the government has been lured into the regulatory equivalent of a blackout drunk, horrified to wake up next to a *****. It doesn’t remember what happened or where it is or how it got there. And then the door opens and the industry steps into the room to coo that everything will be all right, the industry is a friend, the industry will help.”

If you want to know which words the SEC redacted, we recommend reading RTL’s 1 page follow-up letter (hint: it has something to do with a hotel scene from The Godfather: Part II).

We expect that the Cboe proposal will soon hit the trash heap. Last week, the SEC issued an order instituting proceedings to determine whether to approve or disapprove the proposed rule change.  This is usually the death blow unless the Cboe comes up with another iteration of their data leaking proposal.  At this point, we think the Cboe should just do the honorable thing and withdraw the proposal.