Cboe Aligns with SEC: New CAT Reporting Requirements for Market Makers’ Short Sale Exceptions
· Regulation · QuoteReporter
Cboe Aligns with SEC: New CAT Reporting Requirements for Market Makers’ Short Sale Exceptions
In a move that brings Cboe Options Exchange into lockstep with recent SEC mandates, the exchange has filed—and the regulator has greenlit with immediate effect—a proposed amendment to its Consolidated Audit Trail (CAT) Compliance Rule. The change, detailed in SEC Release No. 34-104217, targets enhanced transparency around short sales by mandating that broker-dealers report when market makers invoke the “bona fide market making” (BFMM) exception under Regulation SHO.
This isn’t a seismic overhaul of trading rules, but in the post-GameStop era of heightened scrutiny on short-selling practices, it’s a subtle yet significant step toward better market surveillance. The filing, submitted on September 29 and published Monday, reflects the broader push for granular data in the CAT system—the industry’s central repository for tracking every order, execution, and quote in U.S. equities and options.
### What Changed? A Deeper Dive into Short Sale Reporting
At its core, the amendment adds a new data point to CAT filings. Under the updated Rule 7.22(a)(2)(G), broker-dealers must now flag, for the original receipt or origination of an order to sell an equity security, whether that order qualifies as a short sale tied to bona fide market making activities under Rule 203(b)(2)(iii) of Regulation SHO.
Why this matters: The BFMM exception allows market makers to sell short without first locating borrowable shares, provided they’re actively quoting both sides of the market to provide liquidity. It’s a critical carve-out for efficient trading, but without clear reporting, regulators have struggled to distinguish legitimate market making from potential abuse—like naked shorting or manipulative squeezes.
This aligns directly with the SEC’s 2023 amendments to the CAT NMS Plan (National Market System Plan), which added Section 6.4(d)(ii)(D) to require exactly this disclosure. As Cboe notes in its filing, the change ensures its rules mirror the Plan’s requirements, promoting uniformity across exchanges and bolstering the Commission’s ability to monitor short-sale risks in real time.
“By capturing this information at the order origination stage, CAT will provide a more complete picture of market making activities and their impact on short interest,” the filing states, emphasizing the goal of preventing fraudulent practices while fostering a fair market.
### Broader Implications: Surveillance in the Spotlight
The CAT system, launched in 2020 after years of delays, already logs trillions of events annually. This tweak—effective immediately under Rule 19b-4(f)(1)—adds a lightweight reporting burden but packs a punch for oversight. Expect it to aid in:
– **Abuse Detection:** Easier identification of patterns where the BFMM exception might be stretched, reducing risks of “synthetic” shorting that fueled 2021’s meme-stock frenzy.
– **Liquidity Insights:** Granular data on how market makers contribute to (or withdraw from) depth during volatile periods.
– **Cross-Market Coordination:** Harmonization with other self-regulatory organizations (SROs), as the SEC solicits comments on the filing through mid-December.
For broker-dealers and market makers, compliance is straightforward: Update systems to tag qualifying orders with the new flag. No major tech overhauls needed, but firms should audit their Reg SHO workflows to ensure accurate claims.
Cboe’s filing underscores the exchange’s role as a proactive player in the national market system. As Acting Director Keith Cassidy’s Division of Examinations ramps up FY 2026 priorities (including broker-dealer trading practices), this kind of data enhancement could prove invaluable for risk-based sweeps.
Industry watchers see it as low-drama housekeeping, but in a market where short interest remains a lightning rod—hitting 20% of float in some names—every bit of transparency counts. The SEC’s comment period runs until December 9; expect vocal input from trading desks and liquidity providers.
The full SEC release is available here:
https://www.sec.gov/files/rules/sro/cboe/2025/34-104217.pdf
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