In finance, a locate is an approval from a

broker A broker is a person or firm who arranges transactions between a buyer and a seller for a commission when the deal is executed. A broker who also acts as a seller or as a buyer becomes a principal party to the deal. Neither role should be confu ...

that needs to be obtained prior to effecting a short sale in any equity security, i.e. to "locate" securities available for borrowing. The requirement, in the United States, to locate a stock before '

shorting In finance, being short in an asset means investing in such a way that the investor will profit if the value of the asset falls. This is the opposite of a more conventional " long" position, where the investor will profit if the value of t ...

' has existed for a long time.

Regulation SHO Naked short selling, or naked shorting, is the practice of short-selling a tradable asset of any kind without first borrowing the asset from someone else or ensuring that it can be borrowed. When the seller does not obtain the asset and deliv ...

was announced by the SEC in July 2004. The rule includes a uniform "locate" requirement for

short sales In finance, being short in an asset means investing in such a way that the investor will profit if the value of the asset falls. This is the opposite of a more conventional " long" position, where the investor will profit if the value of t ...

in all equity securities and a requirement for the firms to document what they have done to locate the securities. Regardless of whether the seller’s short position may be closed out by purchasing securities the same day, firms will need to document that they have borrowed or arranged to borrow the stock, or they have reasonable grounds to believe they can borrow the stock and deliver on delivery date.

Market makers A market maker or liquidity provider is a company or an individual that quotes both a buy and a sell price in a tradable asset held in inventory, hoping to make a profit on the ''bid–ask spread'', or ''turn.'' The benefit to the firm is that i ...

effecting short sales in connection with bona fide market making are exempt from this requirement. In addition broker-dealers can rely on " easy to borrow" lists to satisfy the "reasonable grounds" requirement, provided the information used to generate such lists is less than 24 hours old and the securities included on the list are so readily available that it is unlikely the seller will fail to deliver securities on settlement date, but may not rely on the fact that a security is not on a “hard-to-borrow” list to satisfy the test. Each short sale must be matched to a corresponding locate. However, it is not necessary to secure a locate in the same broker – if a short sale purchaser can prove a secured locate at any broker that is sufficient to provide validity of a short sales transaction. Since a locate is not a guarantee that security can be borrowed, there exists a threat there may not actually be actual securities that can be borrowed, resulting in so-called

naked short Nudity is the state of being in which a human is without clothing. The loss of body hair was one of the physical characteristics that marked the biological evolution of modern humans from their hominin ancestors. Adaptations related to ...

. These can be extremely dangerous to the marketand can unnecessarily bring down prices. Responding to such threat, in July 2008 SEC issued an emergency ruling where locates for certain securities had to be backed up by a guaranteed pre-borrow

References

External links

* * *{{cite web, url=https://www.thestreet.com/story/862233/1/knowing-the-rules-of-the-shorting-game.html, first=James J, last=Cramer, title=Knowing the Rules of the Shorting Game Short selling Financial regulation