On December 3, 2025, the Securities and Exchange Commission published a notice in the Federal Register regarding a proposed rule change filed by the Investors Exchange LLC, known as IEX. The filing, dated November 24, 2025, seeks to amend IEX Rule 11.630(a)(2), part of the exchange's compliance rule for the National Market System Plan Governing the Consolidated Audit Trail, or CAT NMS Plan. This amendment requires broker-dealers to report specific details about short sale orders that claim the bona fide market making exception under Rule 203(b)(2)(iii) of Regulation SHO. The rule change became effective immediately under Section 19(b)(3)(A) of the Securities Exchange Act of 1934, as it does not significantly affect investor protection or impose a burden on competition. This development ensures consistency with a 2023 amendment to the CAT NMS Plan, enhancing regulatory oversight of market making activities in equity securities.
Background on the CAT NMS Plan and Regulation SHO
The CAT NMS Plan, approved by the SEC in 2016, establishes a comprehensive database for tracking orders and trades across U.S. markets. It aims to improve market surveillance by requiring self-regulatory organizations, such as exchanges, and their members to report detailed transaction data to a central repository. In 2023, the SEC amended the plan to address gaps in short sale reporting. Specifically, the amendment added a requirement under Section 6.4(d)(ii)(D) of the plan for industry members to report whether an order to sell an equity security is a short sale by a market maker claiming the exception in Regulation SHO.
Regulation SHO, adopted in 2004 and updated over time, governs short selling to prevent abusive practices. Rule 203(b) requires sellers to locate securities before executing a short sale, but it includes exceptions. The bona fide market making exception, found in Rule 203(b)(2)(iii), allows registered market makers to sell short without locating shares if the activity supports liquidity provision in the security. The 2023 CAT amendment, detailed in SEC Releases No. 98738 and 98739 published on November 1, 2023, mandates reporting this exception to enhance transparency and aid regulators in distinguishing legitimate market making from potential manipulation.
IEX, as a participant in the CAT NMS Plan, must update its rules to enforce these reporting obligations on its industry members, which include broker-dealers trading on the exchange.
Details of the Proposed Rule Change
IEX's filing proposes adding a new paragraph (G) to Rule 11.630(a)(2). This paragraph requires each industry member 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 in the security for which the exception in Rule 203(b)(2)(iii) of Regulation SHO is claimed.
This language mirrors the 2023 CAT NMS Plan amendment, ensuring uniformity across exchanges. The filing states that the change assists IEX and its members in meeting obligations under the plan. No comments were solicited or received on the proposal, and it applies equally to all relevant industry members trading equity securities.
The SEC waived the 30-day operative delay, allowing immediate effectiveness, as the change aligns with existing plan requirements and raises no novel issues. Interested parties have until December 29, 2025, to submit comments on the filing, referenced as SR-IEX-2025-30.
Statutory Basis and Impact on Competition
In its statement, IEX asserts that the rule change complies with Section 6(b)(5) of the Securities Exchange Act, which requires rules to prevent fraud, promote just and equitable trade principles, and protect investors. The exchange notes that the amendment furthers the CAT NMS Plan's goals, as outlined in the SEC's 2016 approval order (Release No. 79318), which emphasized the plan's role in maintaining fair and orderly markets.
Regarding competition, IEX states that the change imposes no unnecessary burden, as it aligns with amendments adopted by all national securities exchanges and FINRA. This uniformity avoids competitive disparities and supports consistent regulatory enforcement across the industry.
Perspectives and Implications
From a regulatory perspective, this amendment strengthens surveillance capabilities. Regulators, including the SEC and self-regulatory organizations, can better monitor compliance with Regulation SHO by identifying orders that rely on the market maker exception. This could help detect instances where the exception is misused to circumvent locate requirements, potentially reducing manipulative short selling.
Industry members, such as broker-dealers, may view the change as an additional reporting burden, though it builds on existing CAT obligations. Proponents argue it promotes transparency without unduly restricting legitimate market making, which is essential for liquidity in equity markets. Critics, if any emerge in comments, might highlight implementation costs or complexities in distinguishing bona fide activities.
Short-term implications include the need for firms to update systems and processes by the effective date to capture and report the required data accurately. Long-term, this could lead to more robust data analytics for market oversight, influencing future rulemaking on short sales or market structure.
In summary, IEX's rule change integrates a key enhancement to the CAT framework, promoting consistency and regulatory efficiency. Potential next steps include monitoring for comments during the 60-day period, after which the SEC could suspend the rule if concerns arise. Ongoing debates may focus on balancing reporting requirements with operational feasibility, while future challenges could involve adapting to evolving market practices or additional plan amendments. This development underscores the continued refinement of tools for fair market operations.
