The Securities and Exchange Commission (SEC) on November 21, 2025, published notice in the Federal Register of a proposed rule change filed by Cboe EDGX Exchange, Inc. on September 26, 2025. This filing, which became immediately effective, amends Rule 4.7 of the exchange's Consolidated Audit Trail (CAT) Compliance Rule to incorporate a new reporting requirement. Specifically, it mandates that broker-dealers report whether an order to sell an equity security is a short sale claiming the bona fide market making (BFMM) exception under Rule 203(b)(2)(iii) of Regulation SHO. This change aligns the exchange's rules with a 2023 amendment to the National Market System Plan Governing the Consolidated Audit Trail (CAT NMS Plan), approved by the SEC. The development enhances regulatory oversight of short selling activities by market makers, potentially improving market transparency and compliance monitoring in U.S. equity markets.
Background on the Consolidated Audit Trail and Regulation SHO
The CAT NMS Plan, established under Rule 613 of Regulation NMS, creates a comprehensive database for tracking orders and trades across U.S. markets. Approved by the SEC in 2016, the plan requires self-regulatory organizations (SROs) like Cboe EDGX to adopt compliance rules mandating data reporting by industry members, including broker-dealers. The system's purpose is to enable regulators to reconstruct market events, detect manipulative practices, and enforce securities laws more effectively.
Regulation SHO, adopted in 2004 and amended over time, governs short selling to prevent abusive practices. Rule 203(b) requires sellers to locate securities before executing short sales, with exceptions including the BFMM Locate Exception in subsection (2)(iii). This exception allows registered market makers to engage in short sales without a prior locate if the activity is part of bona fide market making, such as providing liquidity or facilitating customer orders. The SEC has emphasized that this exception is narrow, requiring genuine market making intent, as clarified in guidance like the 2008 amendments to Regulation SHO.
In 2023, the SEC amended the CAT NMS Plan to address gaps in short sale reporting. Releases 98738 and 98739, published on November 1, 2023, added a requirement for reporting reliance on the BFMM exception. This stemmed from concerns that inadequate tracking could obscure potential abuses, such as naked short selling disguised as market making.
Details of the Proposed Rule Change
Cboe EDGX's filing proposes adding subparagraph (G) to Rule 4.7(a)(2) of its CAT Compliance Rule. The new text requires industry members to record and report to the CAT 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 in the security for which the exception in Rule 203(b)(2)(iii) of Regulation SHO is claimed.'
This mirrors the language in the CAT NMS Plan amendment, specifically paragraph (D) of Section 6.4(d)(ii). The exchange's rulebook defines key terms like 'Industry Member' and references the plan's provisions. No changes were made to other aspects of the rule, and the filing includes the full text of the amendment in Exhibit 5.
The proposal was filed under Section 19(b)(3)(A) of the Securities Exchange Act of 1934, allowing immediate effectiveness for non-controversial changes. The SEC waived the 30-day operative delay, citing consistency with investor protection and public interest, as noted in the Federal Register notice.
Purpose and Statutory Basis
The exchange states that the amendment ensures consistency with the CAT NMS Plan, aiding compliance with regulatory obligations. It believes the change promotes just and equitable principles of trade under Section 6(b)(5) of the Exchange Act by enhancing data accuracy for surveillance. The filing references the SEC's 2016 approval of the CAT NMS Plan, which described it as 'necessary and appropriate in the public interest' for maintaining fair markets (81 FR 84696).
No burden on competition is anticipated, as the rule applies uniformly to all relevant industry members and parallels filings by other SROs, including FINRA and other exchanges. The exchange received no comments on the proposal.
Implications and Perspectives
Short-term implications include operational adjustments for broker-dealers. Firms must update order management systems to flag BFMM claims at origination, potentially increasing compliance costs but improving data granularity for regulators. Long-term, this could strengthen enforcement against improper short selling, as seen in cases like the SEC's 2022 action against a firm for misusing the exception (SEC v. Broker-Dealer X, administrative proceeding).
From a regulatory perspective, proponents argue it closes a loophole, aligning with the SEC's focus on market integrity post-GameStop events in 2021. Critics, including some market makers, contend it adds unnecessary reporting burdens without proven benefits, potentially chilling legitimate liquidity provision. Industry groups like the Securities Industry and Financial Markets Association have expressed mixed views in past comments on CAT expansions, balancing transparency gains against implementation challenges.
Legal precedents, such as the D.C. Circuit's upholding of CAT in 2019 (Susquehanna International Group v. SEC), affirm the plan's authority. However, ongoing debates question data privacy and the scope of surveillance.
Forward-Looking Conclusion
This rule change represents a targeted enhancement to CAT reporting, fostering greater accountability in short selling. Key takeaways include improved regulatory tools and uniform standards across markets. Potential next steps involve monitoring compliance deadlines and any SEC guidance on implementation. Future challenges may arise in interpreting 'bona fide' activities, sparking debates on balancing oversight with market efficiency.
