Short Selling
Because dozens of transactions may be contained within each account, each order ticket must be marked either as a long sale, short sale, or short exempt. A long sale occurs when the seller owns the security that is delivered at settlement. This is the most traditional form of trading transactions. A short sale or “selling short” or “going short on a stock” is when an investor sells securities that have been or will be borrowed.
Investors sell short if they believe that the price of a stock will decline in the short-term. Based on this belief, they sell borrowed stock at a market price, and then later buy back the borrowed stock at a hopefully lower price, pocketing the difference. There are some specific rules governing short sales:
Regulation SHO
Regulation SHO was enacted in 2005 to address the potential abuses of naked short selling. Naked short selling is where a short seller does not borrow or arrange to borrow the securities in advance of selling them. When sellers do not deliver the sold securities to buyers within the three-day settlement period, it is called a “failure to deliver.” When many sellers choose to naked short sell, the result can be many, many “failures to deliver,” which could potentially drive down the price of the stock. Some theorists believe that naked short selling can be used to manipulate the market. According to one theory, a lot of naked short selling can give the impression that there are many more shares to be sold than there really are (because many of them don’t really exist), and this impression drives down the price of the shares. This is a controversial theory not held by all market analy