Regulation SHO was designed to target potentially problematic failures to deliver. Prevention of fails is the goal of the locate requirement. Regulation SHO requires broker-dealers to identify a source of borrowable stock before executing a short sale in any equity security with the goal of reducing the number of situations where stock is unavailable for settlement.
But, because the locate is usually done three days before settlement, the stock may not be available from the source at the time of settlement, possibly resulting in a fail. Regulation SHO also requires firms that clear and settle trades to take action to close out failures to deliver by borrowing or purchasing securities of like kind and quantity.
Rule provides an extended period of time to close out certain failures to deliver. Specifically, if a failure to deliver position results from the sale of a security that a person is deemed to own and that such person intends to deliver as soon as all restrictions on delivery have been removed, the firm has up to 35 calendar days following the trade date to close out the failure to deliver position by purchasing securities of like kind and quantity.
Moreover, delivery is required to be made on such sales as soon as all restrictions on delivery have been removed and situations where a person is deemed to own a security are limited to those specified in Rule of Regulation SHO. A common example of a deemed to own security that cannot be delivered by the settlement date is a security subject to the resale restrictions of Rule under the Securities Act of Generally, investors must complete or settle their security transactions within three business days.
When you sell a security, you must deliver your securities, in certificated or electronic form, to your brokerage firm no later than three business days after the sale. The three-day settlement date applies to most security transactions, including stocks, bonds, municipal securities, mutual funds traded through a brokerage firm, and limited partnerships that trade on an exchange. Government securities and stock options settle on the next business day following the trade. Delivery on sales should be made by the settlement date.
Even after adoption of Rule , failures to deliver may occur in certain circumstances. Delivery failures can be caused by both long and short sales. Inclusion on the list should not be interpreted as connoting anything negative about the particular issuer.
Close-out purchases of stock will not necessarily drive up prices of such stocks. One of the primary purposes of Regulation SHO is to clean up open fail positions, but not to cause short squeezes. The rush by short sellers to cover produces additional upward pressure on the price of the stock, which then can cause an even greater squeeze. Although some short squeezes may occur naturally in the market, a scheme to manipulate the price or availability of stock in order to cause a short squeeze is illegal.
To increase the transparency surrounding short sale transactions, several SROs are providing on their websites daily aggregate short selling volume information for individual equity securities.
The SROs are also providing website disclosure on a one-month delayed basis of information regarding individual short sale transactions in all exchange-listed equity securities. The SROs also publish monthly statistics on short interest in securities that trade on their markets. Short interest is the aggregate number of open short sale positions. Short interest does not address the number of failures to deliver that may have occurred or may occur in connection with these short sales.
There also are many commercial websites and some newspapers that offer this information. Threshold securities are included on a list disseminated by an SRO. If a threshold security is listed on more than one market system, the SROs have agreed that the security will appear only on the threshold list of the SRO that maintains the primary listing.
You can obtain SRO threshold lists at the following websites:. Chicago Stock Exchange, Inc. Other national securities exchanges that are not the primary listing exchange for any securities at this time are currently not publishing threshold securities lists. Currently, threshold lists include the name and ticker symbol of securities that meet the threshold level on a particular settlement date.
Some investors have requested that the SROs provide more detailed information for each threshold security, including the name of the broker-dealer firm responsible for the fails and the names of the customers of responsible brokers and dealers responsible for the short sales.
Investors can and should verify the number of failures to deliver in a specific security by checking publicly available data on failures to deliver. The Commission publishes on its website failures to deliver data for all equity securities, regardless of the fails level, twice per month. These claims in fact may be false. Investors and prospective investors should be cautious of rumors on chat rooms where the intent of nameless and faceless computer users is in doubt.
You may also call SEC As a policy, the SEC will neither confirm nor deny the existence of an investigation unless, and until, it becomes a matter of public record as the result of a court action or administrative proceeding. SEC investigations are conducted on a non-public and confidential basis to help assure the integrity of the investigative process. The markets and the SROs are primarily responsible for the surveillance and enforcement of trading activity pursuant to their rules.
The SEC, however, independently or in conjunction with the SROs and other regulatory authorities, actively investigates and prosecutes violations of the federal securities laws.
The SEC takes information alleging violations of the federal securities laws very seriously. Please note, however, the SEC will neither confirm nor deny the existence of an investigation unless, and until, it becomes a matter of public record as the result of a court action or administrative proceeding.
For example, if a seller is net long shares and wants to sell shares, the broker-dealer may mark the sell order for shares "short" if the broker-dealer's books and records identify that the seller sold shares "long" and shares "short. Further, a broker-dealer may not mark the entire sell order "long. Answer: Rule g 1 of Regulation SHO states that "[a]n order to sell shall be marked "long" only if the seller is deemed to own the security being sold pursuant to paragraphs a through f of this section and either: i The security to be delivered is in the physical possession or control of the broker or dealer; or ii It is reasonably expected that the security will be in the physical possession or control of the broker or dealer no later than the settlement of the transaction.
Thus, we remind sellers that where a seller is net long 1, shares and simultaneously enters multiple orders to sell 1, shares owned, only one such order would constitute a long sale.
After the long sale order is entered to sell the 1, shares, it is no longer reasonable to expect that delivery can be made by settlement date on additional orders to sell the same shares. In addition, under Rule g 1 of Regulation SHO, a broker-dealer must mark only one order as "long" and any additional orders as "short. Answer: No. Answer: Rule f provides that, in order to determine its net position, a broker or dealer shall aggregate all of its positions in a security.
For example, if a market maker peg offer is set at the maximum allowable price away from the inside market, such that it is significantly higher than the inside offer and will likely never, or very rarely, be executed, a seller could calculate its net position without decrementing for that open market maker peg offer. Answer: Depending on the facts and circumstances, a market maker peg offer set at the maximum allowable price away from the inside market may be one of the rare scenarios that falls within the parameters of sell orders with no realistic possibility of execution such that a seller could calculate its net position without decrementing for an open unexecuted order to sell a security.
In order to demonstrate that there is no realistic possibility of execution, a broker or dealer should be prepared to demonstrate that such sale orders are never, or very rarely, executed e. Thus, orders that are less likely to be executed, such as non-marketable orders at prices above the current national best bid, but which may nonetheless occasionally or sometimes be executed, would not be considered sell orders with no realistic possibility of execution.
SRO or Commission staff may consider, on a case-by-case basis, whether any other scenarios are applicable based on the facts and circumstances. Is a broker-dealer required to re-mark a pending sell order if the seller increases the quantity or changes the price of the order?
Answer: Rule f provides that, in order to determine its net position, a broker-dealer shall aggregate all of its positions in a security. In addition, if a broker-dealer is using independent trading units for net position calculation, each unit is required under Rule f 2 to determine, at the time of each sale, its net position for every security that it trades. Thus, the broker-dealer may not rely on the initial marking of the sell order, prior to the increase in the quantity of the order, and must re-mark the order at the time of entry of the new sell order reflecting the increased order quantity.
A broker-dealer is not required to re-mark a pending sell order if the seller decreases the quantity of the order. See 17 CFR Question 3. Question 4. Answer: Rule b 1 ii permits a broker or dealer to accept a short sale order in an equity security if the broker-dealer has reasonable grounds to believe that the security can be borrowed so that it can be delivered on the settlement date.
What is reasonable in one context may not be reasonable in another context. See, e. Answer: Easy to Borrow lists generally may be used to establish a reasonable basis for a locate.
Therefore, for example, introducing firms may rely on Easy to Borrow lists of the clearing firms through which they clear and settle transactions unless circumstances indicate that it would not be reasonable to rely on such lists.
For example, if the securities on the Easy to Borrow list have experienced delivery failures, it would not be reasonable to rely on the list. Furthermore, if the Easy to Borrow list is prepared by a clearing firm through which the introducing firm does not clear or settle transactions, or otherwise does not maintain a relationship in which the clearing firm agrees to make securities on its Easy to Borrow lists available to the introducing firm, then it would not be reasonable to rely on the list.
Answer: The executing broker has the responsibility to perform the locate prior to effecting a short sale, and must have a reasonable basis to believe that the security can be delivered on the settlement date. Footnote 58 of the Adopting Release explains that a broker-dealer may obtain an assurance from a customer that the customer can obtain securities from another identified source in time to settle the trade. Rule b 1 requires that the executing broker document the locate.
Documentation should include the source of the securities cited by the customer. Documentation should also include support for the reasonable grounds to rely on customer assurances.
After the executing broker executes a short sale, the executing broker may take steps to confirm the locate information provided by the customer. Confirmation of the locate after the execution of a short sale may provide information on whether the locate based on customer representations was reasonable. However, confirmation after the fact is not a substitute for a locate that is required to be performed before a short sale may be executed.
Answer: Rule requires that the executing broker has the responsibility to perform the locate prior to effecting a short sale, and must have a reasonable basis to believe that the security can be delivered on the settlement date. Reasonableness is based on the facts and circumstances of a particular transaction.
In some instances, it may be reasonable for an executing broker to rely on assurances from a customer that the customer can obtain the securities from an identified source in time to settle the trade. If the executing broker knows or has reason to know that a customer's prior assurances resulted in failures to deliver, however, reliance on further assurances from that customer would not be reasonable. Rule b 1 requires that the locate be made and documented prior to effecting any short sale, including the broker-dealer's reasonable grounds to believe that the security can be borrowed so that it can be delivered on the date delivery is due.
Information important to assessing the broker-dealer's "reasonable grounds" includes information about whether securities were delivered on a timely basis for settlement in situations where the broker-dealer relied on representations from the customer to support its locate.
Accordingly, the executing broker-dealer must consider information, either from its own records or from the records of its clearing firm, about settlement of the customer's trades. It would not be reasonable for an executing broker to assert that it did not know or have reason to know whether a customer's prior short sale trades resulted in delivery failures if the executing broker made no reasonable effort to obtain such information. See Footnote 58 of the Adopting Release.
If the executing broker discovered that the customer's prior assurances resulted in a single failure to deliver, the executing broker should consider the relevant facts and circumstances to determine whether it would be reasonable to rely on the customer's assurances for other transactions. For example, it may be reasonable for an executing broker to rely on the customer's assurances if the circumstances of the fail in a prior transaction were unusual, or if previous locates relying on the customer's assurances resulted in timely deliveries of securities to settle the customer's transactions and the fail in the prior transaction was an anomaly.
Answer: Rule b 1 of Regulation SHO provides that a "broker or dealer may not accept a short sale order in an equity security from another person, or effect a short sale in an equity security for its own account, unless the broker or dealer has: i Borrowed the security, or entered into a bona-fide arrangement to borrow the security; or ii Reasonable grounds to believe that the security can be borrowed so that it can be delivered on the date delivery is due; and iii Documented compliance with this paragraph b 1.
To comply with the rule, the broker-dealer must perform the locate prior to, and on the same day that, the broker-dealer effects each short sale. For example, the broker-dealer must perform a new locate when a Good Till Cancel "GTC" short sale order requiring a locate cannot be effected on the same day that the locate was performed.
Moreover, the broker-dealer may not rely on a pre-existing agreement with another source in lieu of this trade-by-trade determination. In addition, the rule requires that broker-dealers document, at a minimum, the identity of the source, as well as the fact that the locate was performed prior to, and on the same day that, the broker-dealer effected the short sale.
The rule also requires documentation of the number of shares located. We understand, however, that documenting the specific number of shares located may be problematic for systems reasons.
In such circumstances, the broker-dealer must be able to demonstrate, upon request of SRO or Commission staff, that the locate: 1 was performed prior to, and on the same day that, the broker-dealer effected the short sale; 2 the short sale did not exceed the number of shares located, and 3 that there were reasonable grounds to rely on the locate. Footnote 58 of the Adopting Release provides that a broker-dealer may obtain an assurance from a customer that such party can obtain securities from another identified source in time to settle the trade.
As discussed in more detail in Question 4. Where the broker-dealer is relying on a customer assurance, the broker-dealer must demonstrate, upon request of SRO or Commission staff, that it confirmed that the customer performed the locate prior to, and on the same day that, the broker-dealer effected the short sale.
The broker-dealer may not rely on a pre-existing agreement, such as a standing instruction letter or blanket assurance, with a customer when complying with the locate requirements of the rule, but must obtain the customer's individual assurance prior to, and for, each short sale.
Answer: A locate for a security may be re-applied for an intra-day buy-to-cover trade in the following scenario:. The short sale is then executed. If the customer wants to then sell short another shares of XYZ stock in the same trading day, the executing broker-dealer may apply the original locate to that sale, provided that such subsequent short sale is for an amount of securities that is no greater than the amount of securities obtained in the original locate, and provided further that the source of the located shares indicates that the original locate is good for the entire trading day.
For a "hard to borrow" security or a threshold security, a broker-dealer may not re-apply a locate for intra-day buy-to cover trades. Without obtaining locates prior to each short sale in such securities in the scenario described above, it is unlikely that the broker-dealer executing such trades would have reasonable grounds to believe that such securities can be borrowed so that they can be delivered on the date that delivery is due on each trade.
A broker-dealer, however, may have reasonable grounds to believe that securities will be available when delivery is due on such short sales if the broker-dealer pre-borrows the securities. Answer: The locate requirement applies to all equity securities. A security convertible into an equity security is an equity security; therefore, such convertibles would be subject to the locate requirement.
A convertible security that is subject to the locate requirement may qualify for an exception. The Adopting Release states that such circumstances could include the situation where a convertible security, option, or warrant has been tendered for conversion or exchange, but the underlying security is not reasonably expected to be received by the settlement date. In such situation, delivery should be made on the sale as soon as all restrictions on delivery have been removed, and in any event within 35 days after trade date.
If delivery is not made within 35 days after the trade date, the broker-dealer that sold on behalf of the person must either borrow securities or close out the open position by purchasing securities of like kind and quantity. Such circumstances could include the situation where a convertible security, such as an ADR, option, or warrant has been tendered for conversion or exchange, but the underlying security is not reasonably expected to be received by settlement date.
Rule b 1 provides that a broker-dealer may not accept a short sale order in an equity security from another person, or effect a short sale in an equity security for its own account, unless the broker-dealer has borrowed the security, has entered into a bona-fide arrangement to borrow the security; or has reasonable grounds to believe that the security can be borrowed so that it can be delivered on the date delivery is due.
See also infra Question 2. Ownership of a security convertible into, or exchangeable for, the security being sold, is not a borrow or arrangement to borrow the security being sold. Ownership of a security convertible into, or exchangeable for, the security being sold would also not provide reasonable grounds to believe the security being sold can be borrowed. Answer: Rule b 1 ii permits a broker-dealer to accept a short sale order in an equity security from another person if the broker-dealer has reasonable grounds to believe that the security can be borrowed so that it can be delivered on the date delivery is due.
Subject to certain requirements, Rule b 2 i provides an exception to the locate requirement for short sale orders received by a registered broker-dealer from another registered broker-dealer. This "broker to broker" exception applies only to transactions undertaken between broker-dealers registered in the U.
For instance, the U. Moreover, the U. See also FAQs 4. For further information about how the provisions of Regulation SHO may apply to overseas transactions, please refer to Question 1. Regulation SHO provides an exception to the locate requirement for market makers. Are all block positioners excepted from the locate requirement? Answer: Rule b 2 iii provides an exception from the locate requirement for short sales effected by market makers, but only in connection with bona-fide market making activities.
Block positioners, to the extent they engage in bona-fide block positioning activities, may also rely on this exception from the locate requirement in connection with such activities. See Id. One such situation is where a customer owns stock that was formerly restricted, but presently may be sold pursuant to the provisions of Rule under the Securities Act of Rule securities may not be capable of being delivered on settlement date due to processing to remove the restricted legend.
Answer : In certain circumstances, a broker-dealer facilitating a customer order may be required under Regulation NMS to effect a ISO, while the broker-dealer is short the stock. Rule b of Regulation SHO provides that a broker or dealer may not accept a short sale order in an equity security from another person, or effect a short sale in an equity security for its own account, unless the broker or dealer has borrowed the security or entered into a bona-fide arrangement to borrow the security, or has reasonable grounds to believe the security can be borrowed so that it can be delivered on the date delivery is due.
Regulation SHO includes an exception from the locate requirement, in Rule b 2 iii , for short sales effected by market makers in connection with bona-fide market making activities.
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. Securities and Exchange Commission. Day Trading. Stock Trading. Trading Instruments. Actively scan device characteristics for identification.
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