Regulation SHO: Definition, What It Regulates, and Requirements

Regulation SHO, or the Short Sale Restriction Rule, is a set of rules that are designed to prevent and deter abusive short selling practices. The rule was adopted by the Securities and Exchange Commission (SEC) in 2005 in response to the 2004 market crash.

Short selling is a trading strategy in which an investor sells a security that they do not own, with the expectation of buying it back at a lower price in the future. This can be a profitable strategy if the price of the security does indeed decline, but it can also be very risky if the price of the security rises.

Regulation SHO is designed to prevent abusive short selling practices by requiring that investors who engage in short selling have the ability to borrow the securities that they are selling. This requirement is intended to prevent investors from selling securities that they do not own, which can artificially drive down the price of the security.

Regulation SHO also requires that investors who engage in short selling disclose their positions to the market. This disclosure is intended to make it easier for other investors to identify and monitor short selling activity.

Regulation SHO has been effective in reducing abusive short selling practices. However, there have been some concerns that the rule has also made it more difficult for investors to engage in legitimate short selling strategies. The SEC is currently considering whether to make changes to Regulation SHO in order to address these concerns.

In addition to the requirements described above, Regulation SHO also includes a number of other requirements, including:

• A prohibition on naked short selling, which is the sale of a security that the seller does not own or have the right to borrow.
• A requirement that investors who engage in short selling must close out their positions within a specified period of time.
• A requirement that investors who engage in short selling must provide daily updates on their positions.

Regulation SHO is an important rule that helps to protect investors from abusive short selling practices. The rule has been effective in reducing these practices, but there have been some concerns that it has also made it more difficult for investors to engage in legitimate short selling strategies. The SEC is currently considering whether to make changes to Regulation SHO in order to address these concerns.