Quick definition Regulation SHO is an SEC regulation that restricts short selling and prevents naked short selling (selling without ensuring shares are available to borrow). What it is Regulation SHO has several components: - Short-Sale Price Test (uptick rule): short sales can only occur on an uptick - Locate Requirement: brokers must locate borrowable shares before shorting - Fail-to-Deliver Threshold: if a stock accumulates too many fails to deliver, the stock can be marked for mandatory buy-in Why it matters Regulation SHO prevents short sellers from driving prices down during market stress. It also prevents naked short selling, which could theoretically allow unlimited short sales on a stock. SHO is controversial; some argue it is necessary for market stability, while others argue it is overreach that restricts legitimate short selling. Short-Sale Price Test The short-sale price test (uptick rule) applies when a stock has declined 10 percent from the previous day's close. When triggered, short sales can only occur on an uptick (trade at a higher price than the previous trade). This rule is intended to prevent short sellers from piling on during downturns. Locate requirement Before a broker can execute a short sale, they must locate shares to borrow. If no shares are available to borrow, the short cannot execute. This prevents naked short selling. Practical example You want to short a stock that has declined 15 percent today, triggering the uptick rule. You cannot short at prices lower than the previous trade price. You can only short on an uptick. Your broker also checks borrowable shares. If the stock is hard to borrow (demand exceeds supply), your broker may not be able to locate shares, and your short order will be rejected. Effectiveness debate Some argue SHO is effective at preventing market crashes. Others argue the restrictions are minor and do not significantly affect short selling. The debate continues among regulators and market participants. See also - Short Sale - Uptick Rule - Naked Short Sale - Circuit Breaker
