On November 21, 2025, the Securities and Exchange Commission published notice in the Federal Register of a proposed rule change filed by Cboe EDGA Exchange on September 26, 2025. The filing, designated as SR-CboeEDGA-2025-032, amends Rule 4.7 of the exchange's Consolidated Audit Trail Compliance Rule to incorporate a new reporting requirement for short sale orders. This adjustment aligns the exchange's rules with amendments to the National Market System Plan Governing the Consolidated Audit Trail, known as the CAT NMS Plan. The change mandates that industry members report whether an order to sell an equity security is a short sale claiming the bona fide market making exception under Rule 203(b)(2)(iii) of Regulation SHO. Effective immediately under Section 19(b)(3)(A) of the Securities Exchange Act of 1934, this development strengthens the regulatory framework for monitoring short sales and market making activities, potentially improving transparency and compliance in U.S. securities markets.
Background on the Consolidated Audit Trail and Regulation SHO
The Consolidated Audit Trail, or CAT, serves as a comprehensive database for tracking orders and trades across U.S. markets. Established under the CAT NMS Plan approved by the SEC in 2016, it aims to enhance regulators' ability to monitor market activity, detect manipulative practices, and reconstruct trading events. The plan requires self-regulatory organizations like Cboe EDGA to adopt compliance rules that mandate reporting from industry members, including broker-dealers.
Regulation SHO, implemented by the SEC in 2005 and amended over time, governs short selling to prevent abusive practices. A short sale involves selling a security not owned by the seller, with the expectation of buying it back later at a lower price. Rule 203(b) of Regulation SHO includes a locate requirement, mandating that sellers have a reasonable belief they can borrow or deliver the security. However, Rule 203(b)(2)(iii) provides an exception for market makers engaged in bona fide market making activities, allowing them to sell short without a prior locate if it facilitates liquidity provision.
In 2023, the SEC amended the CAT NMS Plan to address gaps in short sale reporting. Specifically, releases numbered 98738 and 98739, published on November 1, 2023, added a requirement for reporting reliance on this market maker exception. This stemmed from ongoing efforts to improve data granularity in CAT, enabling better surveillance of short selling patterns and potential market manipulation.
Key Details of the Proposed Rule Change
Cboe EDGA's filing proposes adding subparagraph (G) to Rule 4.7(a)(2) of its CAT Compliance Rule. This provision requires industry members to record and report to the Central Repository, 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 for which the exception in Rule 203(b)(2)(iii) of Regulation SHO is claimed.
The exchange's statement emphasizes consistency with the CAT NMS Plan amendment. As noted in the filing, 'the purpose of this proposed rule change is to amend Rule 4.7 of the CAT Compliance Rule to be consistent with the amendment to the CAT NMS Plan related to the BFMM Locate Exception.' This mirrors language added to Section 6.4(d)(ii)(D) of the CAT NMS Plan, which imposes the same obligation on all participants.
The rule change became effective immediately upon filing, as it qualifies under Rule 19b-4(f)(6) for non-controversial proposals. The SEC waived the 30-day operative delay, citing alignment with investor protection and public interest. No comments were solicited or received by the exchange prior to filing, though the notice invites public input until December 12, 2025.
Legal and Regulatory Context
This amendment fits into a broader pattern of CAT enhancements. The original CAT NMS Plan, detailed in SEC Release No. 79318 from November 15, 2016, underscored the need for a robust audit trail to protect investors and maintain fair markets. Subsequent amendments, including those in 2023, reflect evolving regulatory priorities, such as addressing short selling amid market volatility events like the 2021 meme stock surges.
Key players include the SEC as the approving authority, Cboe EDGA as the filer, and other self-regulatory organizations like FINRA and national exchanges, which are expected to file similar amendments. The filing asserts consistency with Section 6(b)(5) of the Securities Exchange Act, which requires exchange rules to prevent fraud, promote fair trade, and protect investors without unfairly discriminating.
Precedents include prior CAT rule changes, such as those implementing timestamps and customer identifiers. From a political perspective, this occurs against a backdrop of congressional scrutiny on short selling, with debates in committees like the House Financial Services Committee highlighting concerns over market stability.
Implications and Perspectives
Short-term implications include operational adjustments for broker-dealers, who must update systems to capture and report this data flag. This could enhance SEC and FINRA surveillance, allowing quicker identification of improper exception claims.
Long-term, the change may contribute to more accurate market data, aiding research on liquidity and price discovery. However, it raises questions about reporting burdens. Industry groups, such as the Securities Industry and Financial Markets Association, have previously voiced concerns over CAT costs and complexity, though this specific amendment is presented as minimal.
Regulators view this as a step toward transparency, aligning with goals in SEC Chair Gary Gensler's agenda for market resilience. Market participants might appreciate clearer guidelines but could argue it adds to compliance overhead without proportional benefits. Academic perspectives, as seen in studies from sources like the Journal of Financial Economics, suggest such reporting improves detection of manipulative short selling, though evidence on its impact remains mixed.
In summary, this rule change reinforces the CAT framework by incorporating a targeted reporting requirement for short sales. Potential next steps include similar filings from other exchanges and ongoing SEC review of public comments. Challenges may arise in implementation, such as ensuring data accuracy amid high trading volumes, while debates continue on balancing regulatory oversight with market efficiency.
