Glossary term
Regulation SHO
Regulation SHO is the SEC's short-sale regulation covering order marking, locate requirements, close-out rules, and short-sale price tests.
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What Is Regulation SHO?
Regulation SHO is the SEC's main short-sale regulation for U.S. equity markets. It addresses short-sale order marking, locate requirements, close-out requirements for failures to deliver, and short-sale price test restrictions in certain market conditions.
The rule is often discussed during periods of heavy short selling, meme-stock trading, or concern about naked short selling. The practical point is that short selling is legal when done within the rules, but broker-dealers must follow specific requirements around locating shares and settling trades.
Key Takeaways
- Regulation SHO governs key parts of short-sale activity in U.S. equity markets.
- Broker-dealers generally must mark orders as long, short, or short exempt.
- The locate requirement addresses whether shares can reasonably be borrowed and delivered.
- Close-out rules address failures to deliver.
- The alternative uptick rule can restrict short-sale prices after a large price decline.
How the Rule Works
Regulation SHO includes several major requirements. Order-marking rules help identify whether an order is long, short, or short exempt. Locate rules generally require a broker-dealer to have reasonable grounds to believe the security can be borrowed and delivered before accepting or effecting a short sale. Close-out rules address situations where shares are not delivered on time.
The regulation also includes a short-sale price test restriction, often called the alternative uptick rule, that can apply after a covered security declines by a specified amount during a trading day.
Main Pieces of Regulation SHO
Requirement | Plain-English Purpose |
|---|---|
Order marking | Identifies whether a sale order is long, short, or short exempt |
Locate requirement | Addresses whether shares can reasonably be borrowed for delivery |
Close-out requirement | Requires action on certain failures to deliver |
Price test restriction | Limits short-sale execution prices after sharp declines |
Threshold Securities and Fails to Deliver
One visible part of Regulation SHO is the attention paid to threshold securities and failures to deliver. A failure to deliver can occur when securities are not delivered by settlement. Regulation SHO's close-out rules are designed to reduce persistent failures and settlement problems.
This does not mean every failure to deliver is fraud. Settlement problems can arise for several reasons. The rule's job is to create requirements around delivery and close-out rather than to make a price prediction about any one stock.
What Investors Should Understand
Regulation SHO does not ban short selling. Short selling can support liquidity, hedging, and price discovery. The regulation is aimed at market integrity concerns, especially failures to deliver and abusive short-sale practices.
Investors should be cautious about claims that every short sale is illegal or that Regulation SHO guarantees immediate price movement. The rule governs conduct and settlement obligations; it does not remove normal market risk or prevent all volatility.
The Bottom Line
Regulation SHO is the SEC rule framework for short-sale mechanics in U.S. equity markets. It matters because short selling affects settlement, liquidity, market confidence, and how broker-dealers must handle borrowed-share transactions.