Regulation SHO - Explained
What is Regulation SHO?
Written by J. Mance Gordon
Updated at April 20th, 2024
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What is Regulation SHO?
Regulation SHO is an administrative regulation promulgated by the SEC in 2005 to regulate the short sale of securities.
How does Regulation SHO Work?
Regulation SHO serves to prevent traders from unethical practices in short selling. It establishes a "locate" and "close-out" standard for short-sale transactions. Locating means that a broker must verify that the short seller could borrow and deliver the equity to a purchaser at a future date.
Closeout concerns the requirements associated with delivery (and failure of delivery) of the security. Notably, Rule 201 of the regulation prevents short selling that intends to manipulate the securities share price. It prevents short selling of stock at impermissible prices if the stock has seen a 10% decrease. It serves to reduce the likelihood that short selling will further depress the price of a security that is decreasing in value.