The term Regulation SHO refers to legislation that updated and strengthened the laws concerning short sales of securities. Regulation SHO established trading standards intended to lower the opportunity for traders to engage in unethical naked short selling practices.
A trader will short a stock if they believe its price will fall or they are trying to hedge against price volatility. If the trader is correct, and the price of the security falls, they can buy the stock at the lower price and realize a profit from the transaction. When a trader shorts a stock, they are borrowing the stock from their broker. These securities can come from the firm's inventory, a margin account of another firm's client, or even a lender.
Regulation SHO became effective on January 3, 2005. This rule attempted to address concerns about failures to deliver securities and other potentially abusive forms of naked short selling. There are four general requirements outlined in Regulation SHO: