
Regulation SHO
Regulation SHO is a set of rules from the Securities and Exchange Commission (SEC) implemented in 2005 that governs short sale practices. In 2010, Regulation SHO was amended via changes to Rule 201, which stops short selling on a security when prices have decreased by 10% or more during the trading day, mandating that new bids be above the current price. As a part of Rule 201, trading centers are required to establish and enforce policies that prevent short sales at what would be deemed impermissible prices after a stock is dealt a 10% decrease in its price within the trading day. It specifically dealt with this problem via the modification of Rule 201, which limits the price that short sales can be affected during a period of significant downward price pressure on a stock. The SEC implemented Regulation SHO on January 3, 2005_ — _the first significant update to short selling rules since they were first adopted in 1938.

What Is Regulation SHO?
Regulation SHO is a set of rules from the Securities and Exchange Commission (SEC) implemented in 2005 that governs short sale practices. Regulation SHO established "locate" and "close-out" requirements aimed at curtailing naked short selling and other practices. Naked shorting takes place when investors sell short shares that they do not possess and have not confirmed their ability to possess.



Understanding Regulation SHO
Short selling refers to an exchange of securities through a broker on margin. An investor borrows a stock, sells it, and then buys the stock back to return to the lender. Short sellers are betting the stock they sell will drop in price. Broker-dealers loan securities to clients for the purpose of short selling.
The SEC implemented Regulation SHO on January 3, 2005_ — _the first significant update to short selling rules since they were first adopted in 1938. Regulation SHO's "locate" standard requires brokers to have a reasonable belief the equity to be shorted can be borrowed and delivered on a specific date before short selling can occur. The "close-out" standard represents the increased amount of delivery requirements imposed upon securities that have many extended delivery failures at a clearing agency.
History of Regulation SHO
Regulation SHO has been amended over the years. After initial adoption came two exceptions to the close-out requirement: the legacy provision and the options market maker exception. There were ongoing concerns, though, regarding instances where requirements were not being met for closing out securities that had failed to deliver positions. Those concerns eventually led to the elimination of both exceptions in 2008. The result of this change was the strengthening of the close-out requirements by applying them to failures to deliver as a result of a sales of all equity securities (as well as cutting down the time allowed for failures to deliver to be closed out).
Further changes to Regulation SHO came in 2010. One of the primary issues the SEC had originally sought to address was the use of short selling to artificially force down the price of a security. It specifically dealt with this problem via the modification of Rule 201, which limits the price that short sales can be affected during a period of significant downward price pressure on a stock.
Rule 201 is colloquially known as the alternative uptick rule.
Rule 201 is triggered in the midst of a substantial decrease in a stock's price during intraday trading — specifically when its shares fall at least 10% in one day. It mandates that short-sale orders must include a price above the current bid, a move that prevents sellers from accelerating the downward momentum of a security already in sharp decline.
As a part of Rule 201, trading centers are required to establish and enforce policies that prevent short sales at what would be deemed impermissible prices after a stock is dealt a 10% decrease in its price within the trading day. This would trigger a "circuit breaker" that would bring price test restrictions into effect on short sales on that day and into the next trading day.
Special Considerations
Certain types of short sales can qualify for an exception to Regulation SHO. These orders are known as short exempt and are marked by brokers with the initials SSE. The primary exception is the use of non-standard pricing quotes for trade execution.
Related terms:
Broker-Dealer
The term broker-dealer is used in U.S. securities regulation parlance to describe stock brokerages because the majority of the companies act as both agents and principals. read more
Broker and Example
A broker is an individual or firm that charges a fee or commission for executing buy and sell orders submitted by an investor. read more
Hard-To-Borrow List
A hard-to-borrow list is an inventory record used by brokerages to indicate what securities are difficult to borrow for short sale transactions. read more
Naked Shorting
Naked shorting refers to the practice of selling shorts associated with shares that investors do not already possess. read more
SEC Form U-5S
SEC Form U-5S was a filing with the Securities and Exchange Commission (SEC) that had to be filed annually by every registered holding company. read more
Securities and Exchange Commission (SEC)
The Securities and Exchange Commission (SEC) is a U.S. government agency created by Congress to regulate the securities markets and protect investors. read more
Short Exempt
Short exempt refers to a short sale order exempted from the uptick rule regulated under the Securities and Exchange Commission’s (SEC) Regulation SHO. read more
Short Sale
A short sale is the sale of an asset or stock that the seller does not own. read more
Short Selling : What Is Shorting Stocks?
Short selling occurs when an investor borrows a security, sells it on the open market, and expects to buy it back later for less money. read more
Threshold List
A threshold list, or Regulation SHO Threshold Security List, is a list of stocks whose transactions failed to clear during the previous trading days. read more