Trade Reporting of Short Sales

The order mark is what a firm writes on the ticket. The trade report indicator is what it sends FINRA after the trade. Two separate FINRA rules set that indicator, one for national market system (NMS) stocks and one for OTC equity securities, and the pair of them differ in a way the exam can test with a single word.

What Must a Trade Report Show on a Short Sale in an NMS Stock?

The short sale trade reporting rule for NMS stocks states the duty this way. Pursuant to applicable trade reporting rules, members must indicate on trade reports submitted to FINRA whether a transaction is a short sale or a short sale exempt transaction. Those are the short sale reporting requirements.

The scope statement is broad. They apply to transactions in all NMS stocks, as that term is defined in the Regulation NMS definitions.

The indicator follows from that. All short sale transactions in these securities reported to FINRA must carry a "short sale" indicator, or a "short sale exempt" indicator if it is a short sale transaction in a "covered security" that may be marked "short exempt" under Regulation SHO.

A covered security, for this purpose, is any NMS stock, which is how the short sale price test defines the term. That parenthetical ties the report back to the ticket. The second indicator exists only because the short exempt mark exists, and the short exempt mark exists only for a covered security.

Exam Tip: Gotchas

• The reporting duty runs on the transaction, not on the firm's status. Every short sale transaction in an NMS stock reported to FINRA carries an indicator, whatever the reporting member's role was.
• The short sale exempt indicator is conditional. It attaches where the transaction is a short sale in a covered security that may be marked short exempt, so a short sale that never qualified for the mark takes the plain short sale indicator.

What Must a Trade Report Show on a Short Sale in an OTC Equity Security?

The short sale trade reporting rule for OTC equity securities states a narrower duty. Pursuant to applicable trade reporting rules, members must indicate on trade reports submitted to FINRA whether a transaction is a short sale transaction.

Its scope statement names a different universe. The short sale reporting requirements apply to transactions in all OTC Equity Securities, as that term is defined in the OTC equity definitions.

And it names one indicator. All short sale transactions in these securities reported to FINRA must carry a "short sale" indicator.

There is no second indicator here, and that follows from the price test's own scope. A short exempt mark is available only for a covered security, so an OTC equity security never generates a transaction the second indicator could describe.

Exam Tip: Gotchas

• The two rules are not written the same way. The NMS stock rule states two indicators; the OTC equity rule states one, and an answer giving both to an OTC equity trade adds an indicator the rule does not provide.
• The absence of the second indicator is a scope result, not an oversight. The short exempt mark reaches covered securities only, so there is nothing for a second indicator to flag on an OTC equity trade.

Which Securities Count as OTC Equity Securities?

The OTC equity definitions set the term in two moves.

• The base. An OTC Equity Security means any equity security that is not an "NMS stock" as that term is defined in the Regulation NMS definitions.
• The proviso. Provided, however, that the term shall not include any Restricted Equity Security.

A Restricted Equity Security means any equity security that meets the definition of "restricted security" as that term is contained in the restricted securities resale safe harbor.

Because the proviso carves them out, a restricted equity security is not an OTC Equity Security for the purposes of that definition, and so is not inside the scope statement of the OTC short sale reporting rule.

The facilities a member reports to, the timing of a report and the acceptance of a trade report are covered in the unit on reporting trades to the designated reporting facility.

Exam Tip: Gotchas

• The OTC equity definition is built by subtraction, then narrowed again. It starts from every equity security that is not an NMS stock and then removes restricted equity securities by proviso.
• A restricted equity security is defined by borrowing another rule's test. It is any equity security meeting the restricted security definition in the restricted securities resale safe harbor, so the carve-out moves whenever that definition does.

What Should You Check on Exam Day?

• Identify the security first. An NMS stock takes the two-indicator rule, and an OTC equity security takes the one-indicator rule.
• On an NMS stock, require the short sale exempt indicator only where the transaction is in a covered security that may be marked short exempt.
• On an OTC equity trade, reject any answer offering a short sale exempt indicator.
• Check whether the security is a restricted equity security, which the OTC equity definition carves out by proviso.
• Keep the order mark separate from the trade report indicator; they are set by different rules.