What is the purpose of Regulation SHO?

Regulation SHO primarily focuses on short selling of securities, and its purpose is to establish requirements that ensure broker-dealers can borrow the securities they need for short selling transactions. This regulation is critical because short selling involves selling stocks that the seller does not currently own with the expectation that the price will decline. In order for a broker-dealer to facilitate this process, they must be able to borrow the security to deliver to the buyer.

To maintain market integrity and prevent potential abuse in short selling, Regulation SHO imposes rules that require broker-dealers to locate and borrow the securities before executing a short sale. This "locate" requirement aims to reduce the risk of "naked" short selling, where a sale is made without ensuring that the securities can be borrowed. By ensuring broker-dealers have access to the necessary securities, Regulation SHO contributes to a more orderly marketplace and reduces the chance of settlement failures.

Therefore, the essence of Regulation SHO is closely tied to its role in facilitating responsible short selling practices within the financial markets.