“Naked short selling” is often claimed by struggling public companies to be the source of their woes. But there have been relatively few cases addressing naked short selling. Recently, however, on May 19, 2021, the SEC charged a broker-dealer (“BD”) with violating the order-making and locate provisions of Regulation SHO. Regulation SHO regulates short sales of securities and, broadly speaking, is aimed at minimizing naked short selling, failures to deliver, and other practices.
What is Short Selling?
According to the SEC’s Complaint, “[s]hort selling occurs when an investor borrows a security and sells it on the open market, planning to buy it back later for less money.” Thus, short sellers profit from a decline in the price of a security. This is in contrast to “long” investors, who profit from an increase in the price of a security. Short selling is very risky: losses are unlimited because the price of a security can always increase.
What is Regulation SHO?
Regulation SHO, enacted in 2005, established “locate” and “close-out” requirements. Rule 200(g) of Regulation SHO requires BDs to mark all orders to sell stock as “long,” “short,” or “short-exempt.”
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