Welcome to Handling and Executing Short Sales: the unit that decides when a sale is short at all, what a firm must line up before it accepts one, and who has to buy the stock back when delivery never arrives.
Exam Weight: about 4 of the 50 scored items (CertFuel planning estimate; FINRA publishes weights only by function, and Function 1, Trading Activities, is 41 items / 82%)
What You'll Learn
In this unit, you'll cover:
- Short Sale Regulations: the two-branch definition of a short sale, the six routes to deemed ownership, the net long cap, the two broker-dealer deeming paragraphs, and the four conditions for unit-level aggregation
- Locates and Borrows: the two sourcing routes plus the documentation, the four exceptions and the 35-day clock inside one of them, and the separate prohibition on a sale marked long
- The Price Test: the 10% trigger measured against the prior day's listing-market close, the two-day restriction and its re-trigger, and the executions a trading center's procedures must still permit
- Close-Out Requirements for Threshold Securities: what earns a security the threshold label, the thirteen-day close-out by purchase, the thirty-five day restricted-securities proviso, and the pre-borrow bars that follow
- Close-Out Requirements for Fails to Deliver: the settlement-date delivery duty, the three provisos that move the deadline, the pre-borrow bar and its certification escape, and the bona fide purchase or borrow route out
- Order Marking Requirements: the three marks, the two-part test for long, the gate for short exempt, and why the rule states no condition for short
- Trade Reporting of Short Sales: the two-indicator rule for national market system stocks, the one-indicator rule for OTC equity securities, and the definitions that split them
- Short Sale Exemptions: the firm's own above-the-bid identification, the seven reasonable-basis situations, the conditions buried inside two of them, and who can grant an exemption
Why This Matters
Short selling is the part of a trading desk's day with the most moving parts and the least room for a judgment call. A firm marks the ticket, sources the stock, prices the order against a restriction it may not have noticed, reports the trade with the right indicator, and then answers for the delivery days later.
The rules are also written to be read closely, and that is what the exam tests. Several of them turn on a single word:
- Whether ownership alone is enough, or ownership plus possession
- Whether a deadline counts settlement days or calendar days, and from which date
- Whether a close-out may be met by borrowing, or only by purchasing
- Whether a duty sits on the trading center, the participant, or the firm that sold the stock
Let's start with what makes a sale a short sale, and what it takes to be deemed to own the stock you are selling.