Order Marking Requirements

Three marks, and only two of them carry conditions. Regulation SHO's definition and order marking rule states what a firm must satisfy before writing long and before writing short exempt, and states nothing at all about writing short.

Which Orders Must Be Marked, and With What?

A broker or dealer must mark all sell orders of any equity security as "long," "short," or "short exempt."

Two words in that sentence do most of the work. All sell orders means the duty is not limited to short sales; a firm marks the long ones too. Any equity security means the duty is not limited to a national market system (NMS) stock, so an OTC equity security is marked as well.

Exam Tip: Gotchas

• The marking duty reaches any equity security, not only an NMS stock. The price test is limited to covered securities, but this marking sentence is not, so the two rules have different scopes.
• Every sell order gets a mark, including a long one. The obligation is stated over all sell orders, so an answer describing the mark as something only short sellers apply is too narrow.
• The rule states no condition for the short mark. It sets conditions for long and for short exempt, which leaves short as the residual mark for a sale that qualifies for neither.

When May an Order Be Marked Long?

An order to sell shall be marked "long" only if two things hold at once.

• The seller is deemed to own the security being sold under the definition, deemed-ownership, net long, broker-dealer deeming and aggregation paragraphs, and
• either the security to be delivered is in the physical possession or control of the broker or dealer, or it is reasonably expected that the security will be in the physical possession or control of the broker or dealer no later than the settlement of the transaction.

The second limb is itself a pair of alternatives, so a firm that does not yet hold the stock can still mark the order long where it reasonably expects possession or control by settlement.

What the second limb does not permit is a long mark on ownership alone. A seller can be deemed to own stock, on an unconditional purchase contract for instance, and the order still cannot be marked long unless the possession or expectation test is also met.

Exam Tip: Gotchas

• Deemed ownership by itself does not buy a long mark. The rule joins ownership to the possession limb with "and", so both have to hold.
• The possession limb is satisfied by a reasonable expectation. Possession or control by no later than settlement of the transaction is enough, so an answer demanding the certificates in hand at order entry overstates it.
• The ownership test runs through the whole set of ownership paragraphs. That includes the net long cap, so a customer long 1,000 shares and short 800 shares can mark only 200 shares long.

When May an Order Be Marked Short Exempt?

A sale order shall be marked "short exempt" only if the provisions of one of the alternative uptick rule's two exemption paragraphs are met.

• The paragraph letting a firm mark the order short exempt where it identifies the order as being at a price above the current national best bid at the time of submission, or
• The paragraph listing the seven situations in which a firm with a reasonable basis to believe one of them applies may use the mark.

Those two paragraphs are the whole gate, and both of them open only following a determination and notification that a covered security has fallen 10% or more from its prior day's closing price as determined by the listing market. The lesson on short sale exemptions works through them.

That has a consequence for scope. The alternative uptick rule reaches a covered security only, meaning an NMS stock, so an order in an OTC equity security has no route to a short exempt mark and is marked long or short.

Exam Tip: Gotchas

• There is no short exempt route for an OTC equity security. Both gates sit inside a rule that applies to covered securities, so an OTC equity sell order takes a long or a short mark and nothing else.
• Neither gate is a standing permission. Both open only after the listing market has determined and published a 10% decline in that covered security, so a firm cannot pre-mark orders short exempt on a quiet day.

What Should You Check on Exam Day?

• Apply the marking duty to every sell order in any equity security, not only to short sales and not only to NMS stocks.
• For a long mark, require deemed ownership and physical possession or control, or a reasonable expectation of it by settlement.
• Apply the net long cap before marking, and split a partly covered sale into its long and short portions.
• For a short exempt mark, confirm the security is a covered security and that the price-test determination and notification has already happened.
• Treat short as the residual mark, since the rule states conditions for the other two only.