Short Sales and Regulation SHO

Investors sell short in the belief that the price of a stock will decline in the short-term. They sell borrowed stock at a market price and then later buy the borrowed stock back, hopefully at a lower price, where they may pocket the difference. Short sales are very risky transactions that have invited heavy regulation.

We have seen that short sellers must keep a margin account with their broker and maintain an amount of collateral in excess of their sale. We know, too, that margin requirements are governed by Regulation T. In a series of rulings beginning in 2005, the SEC imposed Regulation SHO to address the potential abuses of naked short selling.

Naked short selling is selling short without first borrowing or arranging to borrow the securities in advance of