Naked Short Selling (Reg SHO Threshold)
The Formal Definition
The illegal practice of short selling shares that have not been affirmatively borrowed or located by settlement date, resulting in a persistent Failure to Deliver (FTD) and landing the security on the SEC Regulation SHO Threshold List.
Reg SHO Threshold Criteria: Aggregate FTDs ≥ 10,000 Shares AND ≥ 0.5% of Issuer's Outstanding Shares for 5 Consecutive Settlement Days
Cole Barrett's Reality Check
The Unvarnished Bottom Line"Naked shorting is selling phantom shares you do not own and never located. When short sellers flood the market with un-borrowed shares, Failures to Deliver pile up like uncashed checks. When a stock lands on the Reg SHO threshold list, Wall Street's clearing plumbing is backed up with phantom inventory."
Interactive Simulator: Test the Math
Real-World Example: Scenario Breakdown
Examining the real numbers for: Small-cap stock subjected to heavy short selling and consecutive clearing settlement failures
| Execution Metric | Compliant Broker (Affirmative Locate on Record) | Aggressive Desk (Naked Short Execution) |
|---|---|---|
| Fee / Rate | $1.00 fee | $0.00 |
| Spread / Buffer | Pre-borrowed verified shares via electronic locate portal | Sold shares without pre-borrow locate confirmation |
| Execution / Status | Settled on T+1 settlement without clearing failure | Failed to deliver on T+1; stock hit Reg SHO Threshold List |
| Total Cost / Result | Zero failure-to-deliver exposure | Suffered catastrophic forced buy-in liquidation |
How Brokers Weaponize This Term
Clearing internalizers exploit broker-dealer 'bona fide market maker' exemptions to sell short without locates, diluting effective share floats and leaving retail longs holding un-settled clearing IOUs.
Broker Evaluation Matrix
Cole Approves
Interactive Brokers: Automated electronic locate tool displaying live locate pricing and available share depth before short order entry.
Read Audit →Cole Flags / Avoids
Zero-Fee Clearing Desks: Opaque locate mechanics that pass short squeeze buy-in risks directly onto unsuspecting retail clients.
View Trap Details →Frequently Asked Questions
What happens when a stock is on the Reg SHO Threshold List?
Broker-dealers with persistent fail-to-deliver positions must close out the fails by purchasing shares on the open market after 13 consecutive settlement days.
Is naked short selling legal for market makers?
Market makers have a narrow statutory exemption for 'bona fide market making' to provide liquidity, but using it to suppress prices is strictly illegal.