Apply Short Sale Rules - Series 7

1. Which order marking is used for a short sale that qualifies for a Rule $201$ exemption?

   Mark the order as "short exempt". Short exempt marking allows qualifying short sales to proceed without adhering to Rule 201's price restriction.

2. Which marking is correct when Rule $201$ is in effect and the short sale qualifies for an exemption?

   Mark the order as "short exempt". Rule 201 exemptions permit short exempt marking for activities like odd-lot transactions or market making.

3. Which rule creates the short sale price test restriction for a security with a $10\%$ intraday decline?

   Regulation SHO Rule $201$ (alternative uptick rule). Rule 201 imposes a circuit breaker restricting short sales after a significant price drop to curb downward pressure.

4. What is a short sale under Regulation SHO?

   Sale of a security not owned, completed by borrowing and delivering shares. Regulation SHO Rule 200 defines a short sale as selling a security the seller does not own, requiring borrowing to deliver by settlement.

5. What does the Regulation SHO locate requirement require before a short sale is executed?

   Reasonable grounds to believe shares can be borrowed and delivered by settlement. Rule 203 requires broker-dealers to locate shares for borrowing before executing short sales to prevent fails to deliver.

6. Which pricing is permitted under Rule $201$: short at NBBO bid or short above the national best bid?

   Short above the current national best bid. Rule 201 prohibits shorting at or below the bid when triggered, allowing only above to reduce selling pressure.

7. Which marking is correct when a customer does not own the security and wants to sell it?

   Mark the order as "short". Rule 200 requires short marking for sales where the seller does not own the security to trigger locate requirements.

8. What price condition must be met to short a stock when Rule $201$ is triggered?

   The short sale must be priced above the current national best bid. When triggered, Rule 201 requires short sales to be executed above the national best bid to limit selling pressure.

9. Identify the trigger for Rule $201$ in a covered security.

   A price decline of $10\%$ or more from the prior day close. Rule 201 activates for covered securities declining $10\%$ or more from the prior close to prevent excessive volatility.

10. Which list identifies securities with significant fails to deliver under Regulation SHO?

    The threshold securities list. Exchanges publish this list daily for securities with high fail rates to trigger stricter close-out requirements.

11. Which short sale practice is prohibited because it involves selling shares without borrowing or locating?

    Naked short selling. This practice violates Rule 203 by lacking a pre-trade locate, leading to potential fails and market manipulation.

12. How long does the Rule $201$ restriction remain in effect after being triggered?

    Remainder of that day and the next trading day. The restriction under Rule 201 applies from trigger through the next trading day to stabilize the security's price.

13. What is the standard settlement cycle for most U.S. equity trades relevant to delivery timing?

    $T+1$ settlement for most U.S. equities. The T+1 cycle, effective May 2024, requires delivery the next business day after trade to reduce settlement risk.

14. What is the purpose of the Regulation SHO close-out requirement?

    To eliminate fails to deliver by mandatory buy-in or borrow and delivery. Rule 204 mandates closing out fails through buy-ins or borrows to maintain market integrity and reduce naked shorts.

15. Which order marking is required for a short sale order?

    Mark the order as "short". Rule 200(g) mandates marking orders as short to indicate the seller does not own the security and ensure proper Reg SHO application.

16. What must a broker-dealer generally do before accepting a short sale order from a customer?

    Obtain or rely on a valid locate before execution. Rule 203 requires this to ensure shares are available for delivery, preventing potential fails to deliver.

17. Identify whether Rule $201$ is triggered: prior close $50$, current price $44$.

    Yes; decline is $12\%$. The $12\%$ decline from $50$ to $44$ exceeds the $10\%$ threshold, activating Rule 201's restrictions.

18. What is a "fail to deliver" for Regulation SHO purposes?

    Failure to deliver securities by settlement date. A fail to deliver occurs when the seller does not provide securities to the buyer by the required settlement date.

19. Which order marking is required when the seller is long the security being sold?

    Mark the order as "long". Rule 200(g) requires long marking when the seller owns the security and delivery is reasonably expected by settlement.

20. What does order marking "short exempt" indicate?

    Short sale exempt from the short sale price test restriction. Short exempt marking under Rule 200(g) allows bypassing the price test for qualifying transactions like bona fide market making.

21. Identify the key difference between a locate and a borrow in short selling.

    Locate is a pre-trade availability check; borrow is the actual loan of shares. A locate confirms potential availability pre-trade, while borrowing secures actual shares for delivery post-trade.

22. Identify whether Rule $201$ is triggered: prior close $20$, current price $18.20$.

    No; decline is $9\%$. The $9\%$ decline from $20$ to $18.20$ falls below the $10\%$ threshold, so Rule 201 is not triggered.

23. What is the primary compliance purpose of accurate long/short order marking?

    To ensure correct application of Reg SHO locate and price test requirements. Accurate marking helps broker-dealers apply locate rules to shorts and exempt price tests appropriately.

24. What condition generally causes a security to be placed on a threshold list?

    Persistent, significant fails to deliver meeting threshold criteria. Securities qualify if fails equal at least 0.5% of shares outstanding and 10,000 shares for 5 consecutive days.

Study these flashcards