In the Equities market, it is necessary to borrow the securities we intend to sell. In other words, in order to open a short position, the assets must be borrowed before the trade begins.
In this context, we will present some essential concepts for understanding Short Locate and its specificities.
Easy-To-Borrow (ETB) & Hard-To-Borrow (HTB)
Easy-To-Borrow (ETB) securities have fewer restrictions for opening short positions. Consequently, it is not necessary to perform the locate process in order to initiate a short sale. In general, the costs of executing such sales are either negligible or very low.
On the other hand, Hard-To-Borrow (HTB) securities are subject to greater restrictions and require the locate process to be completed. In addition, higher operational costs are usually associated with this type of short sale.
Short Sale Restriction (SSR): Regra do Uptick
Securities may be classified as SSR if their price drops by 10% or more within a single trading day. When a security is under SSR, short sale orders can only be placed at a price equal to or higher than the current Bid. For this reason, SSR is commonly referred to as the Uptick Rule.
For example, in the image below, the Bid is 213.99. Therefore, if AAPL were under SSR at that moment, it would be possible to submit short sale orders at 213.99 or above.
Reg SHO
Similar to SSR, Regulation SHO also aims to regulate how the short selling process takes place. If a security is listed under Reg SHO, it will be necessary to perform a locate for each new short sale transaction. If it is not, a single locate is sufficient, and the shares will remain borrowed until the end of the trading day.
To check whether a security is under SSR or Reg SHO, simply hover the mouse cursor over the asset’s name.
Below is a flowchart that describes the Short Locate process based on the concepts discussed above.
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