On January 21, 2026, the Securities and Exchange Commission published a notice in the Federal Register regarding a proposed rule change filed by 24X National Exchange LLC. The exchange seeks to amend its Consolidated Audit Trail Compliance Rule to incorporate a new reporting requirement related to short sales. This change stems from a 2023 amendment to the National Market System Plan Governing the Consolidated Audit Trail, which mandates that broker-dealers report whether an order to sell an equity security claims the bona fide market making exception under Regulation SHO. Effective immediately upon filing, the proposal aims to ensure consistency between the exchange's rules and the broader CAT framework, bolstering transparency in securities trading. This development is significant as it addresses regulatory needs for tracking market maker activities in short selling, potentially aiding in the prevention of manipulative practices.
Background on the CAT NMS Plan and Regulation SHO
The Consolidated Audit Trail, or CAT, is a comprehensive database designed to track orders and trades across U.S. securities markets. Established under the CAT NMS Plan, it enables regulators to monitor market activities more effectively. The plan requires self-regulatory organizations, such as exchanges, to enforce compliance rules on their members, known as industry members.
Regulation SHO, implemented by the SEC in 2005, governs short selling to prevent abusive practices. Rule 203(b) of Regulation SHO includes a locate requirement, mandating that sellers locate securities before executing a short sale. However, Rule 203(b)(2)(iii) provides an exception for market makers engaged in bona fide market making activities, often referred to as the BFMM Locate Exception. This allows market makers to facilitate liquidity without prior locates, provided their actions are genuine market making.
In 2023, the SEC amended the CAT NMS Plan to enhance reporting on this exception. As detailed in SEC Release Nos. 98738 and 98739, published in the Federal Register on November 1, 2023, the amendment added a provision to Section 6.4(d)(ii) of the plan. It requires participants to mandate that industry members report, for the original receipt or origination of a short sale order in an equity security, whether the order claims the BFMM Locate Exception.
Details of the Proposed Rule Change
24X National Exchange filed the proposal on January 14, 2026, under Section 19(b)(3)(A) of the Securities Exchange Act of 1934, allowing immediate effectiveness. The amendment targets Rule 4.7 of the exchange's CAT Compliance Rule. Specifically, it adds a new paragraph (G), which states: 'for the original receipt or origination of an order to sell an equity security, whether the order is for a short sale effected by a market maker in connection with bona fide market making activities in the security for which the exception in Rule 203(b)(2)(iii) of Regulation SHO is claimed.'
This language mirrors the CAT NMS Plan's amendment, ensuring uniformity. The exchange's filing emphasizes that the change applies to all industry members with CAT reporting obligations, promoting consistent data submission to the Central Repository. No comments were received on the proposal, and it aligns with similar updates expected from other national securities exchanges and FINRA.
Key Players and Regulatory Context
The primary entities involved include 24X National Exchange, a self-regulatory organization, and the SEC, which oversees the CAT NMS Plan. Industry members, such as broker-dealers, are directly affected as they must comply with the updated reporting. The plan's participants, including all national securities exchanges and FINRA, share responsibility for implementation.
This rule change fits into a broader regulatory landscape shaped by the SEC's efforts to refine market surveillance. For instance, the original CAT NMS Plan approval in 2016, as noted in SEC Release No. 79318, highlighted the plan's role in protecting investors and maintaining fair markets. The 2023 amendment builds on this by addressing gaps in short sale monitoring, drawing from lessons in market events like the 2008 financial crisis, which prompted Regulation SHO enhancements.
Different perspectives emerge on this requirement. Regulators view it as a tool to verify legitimate use of the BFMM exception, potentially reducing risks of naked short selling. Market makers argue it adds reporting burdens but acknowledges its value in demonstrating compliance. Critics, including some industry groups, have expressed concerns in past SEC comment periods about over-regulation stifling liquidity, though no specific opposition is noted in this filing.
Implications for Market Participants and Oversight
In the short term, the amendment requires industry members to update their systems and processes for CAT reporting. This could involve technical adjustments to capture and transmit the BFMM indicator accurately, with compliance deadlines tied to the plan's implementation timeline.
Longer-term implications include improved regulatory analytics. By flagging BFMM claims, the CAT can help identify patterns of exception usage, aiding investigations into potential abuses. For example, excessive reliance on the exception without corresponding market making activity might trigger scrutiny, aligning with SEC goals under Section 6(b)(5) of the Exchange Act to prevent fraudulent practices.
From a competition standpoint, the exchange's filing asserts no undue burden, as the rule applies uniformly and mirrors requirements across the industry. This consistency fosters a level playing field, though smaller firms might face higher relative costs for compliance upgrades.
The proposal also intersects with ongoing debates on short selling reforms. Recent SEC initiatives, such as proposed enhancements to Regulation SHO in 2022, reflect persistent concerns about transparency. While this change is narrow, it contributes to a mosaic of rules aimed at robust market integrity.
In summary, this rule change by 24X National Exchange integrates a critical update to CAT reporting, enhancing oversight of short sales. Potential next steps include SEC review of any comments received by February 17, 2026, and possible temporary suspension if issues arise. Ongoing challenges involve balancing reporting requirements with operational efficiency, while debates continue on the optimal scope of market maker exceptions in evolving securities markets.
