Quick Answer
A sale is short if the seller does not own the security or delivers a security borrowed by or for the seller. Absent an exception, a documented locate comes first. Every equity sell order is marked, a national market system stock down 10% from the prior close triggers a price test, and clearing participants generally close out fails.
One sheet: when a sale is short, what comes first, how it is marked, and who buys in when delivery fails.
Which One-Liners Win Points?
- The definition's two branches are joined by "or". Delivery out of a borrow by or for the seller makes the sale short.
- Deemed ownership generally counts only to the extent of a net long position. A convertible, an option, or rights and warrants count only once tendered or exercised; long 1,000 and short 800 means 200 shares are owned.
- The locate: before accepting or effecting a short sale in an equity security, a broker or dealer must have borrowed the stock or entered a bona fide arrangement to borrow it, or have reasonable grounds to believe it can be borrowed for delivery when due, and document compliance either way.
- Four locate exceptions: an order from another registered broker or dealer bound by the rule, unless the relying firm contractually took on that compliance; a deemed owner intending to deliver once restrictions lift; bona fide market making in that security; and security futures.
- Every sell order in any equity security is marked long, short or short exempt. Long needs deemed ownership and the firm's possession or control, or a reasonable expectation of it by settlement.
- The price test reaches only national market system (NMS) stocks. Once triggered, trading center procedures must be reasonably designed to prevent executing or displaying a short sale at or below the current national best bid, and to permit short exempt orders and displayed orders priced above that bid at initial display.
- Short exempt opens only after the listing market's 10% determination and notice: the submitting firm identifies the order as above the current national best bid at submission, under written procedures, or has a reasonable basis to believe one of seven situations applies.
- Trade reports: a short sale in an NMS stock carries a short sale indicator, or a short sale exempt indicator where the short exempt mark was available; one in an over-the-counter (OTC) equity security carries the short sale indicator only.
Which Numbers Matter Most?
| Item | Value |
|---|---|
| Price-test trigger | 10% or more below the prior day's listing-market close |
| Price-test duration | Rest of that day and the following day, while a national best bid is disseminated |
| Threshold security | Fail of 10,000 shares or more and at least 0.5% of shares outstanding for five consecutive settlement days, plus a self-regulatory organization list |
| Baseline fail close-out | Beginning of regular trading hours on the settlement day after settlement date; borrow or purchase |
| Documented long sale or bona fide market making fail | Third consecutive settlement day after settlement date; borrow or purchase |
| Deemed-owner fail | 35th consecutive calendar day after trade date; purchase only |
| Threshold-security fail | 13 consecutive settlement days; purchase only |
Which Gotchas Trip Students Up?
- An OTC equity security has no short exempt route, because the price test reaches NMS stocks only.
- The close-out duty sits on the clearing participant, not the selling firm, unless that firm is the participant or receives a reasonable allocation based on its short position. The fail close-out reaches long sales too.
- An unclosed fail triggers a pre-borrow bar on the participant and firms clearing through it, even one relying on bona fide market making. Only a closing purchase lifts it, never a borrow.
- Under the fail rule, a firm is caught only to the extent it submits its short sales to that participant for clearance; the closing purchase must have cleared and settled, and a firm can escape by timely certification.
One-Breath Recap
A sale is short when the seller does not own the security or delivers a security borrowed by or for the seller, and ownership generally counts only to a net long position. Before a short sale in an equity security, a broker or dealer needs a borrow, a borrowing arrangement or reasonable grounds to believe the stock can be borrowed, plus documentation, unless excepted. Every equity sell order is marked long, short or short exempt. After a 10% drop from the prior day's close in a national market system stock, trading centers need procedures blocking short sales at or below the national best bid that day and the next while that bid is disseminated, with exceptions. A clearing participant generally closes out fails by borrowing or purchasing, and threshold-security fails by purchasing only.
Need more than the recap? Read the full Handling and Executing Short Sales unit.