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Locate requirement

The rule that a broker must have reasonable grounds to believe shares can be delivered before accepting a short sale, satisfied by finding an actual borrow.

Under regulation-sho a broker must obtain a locate before executing a short, document it, and keep the record. For an easy-to-borrow name the morning list counts as the locate; for a hard-to-borrow name the desk must source a specific quantity, often for a fee charged whether or not the trade is used.

Market makers have a narrow exemption for bona fide market making, which is the technical source of most legitimate short selling without a pre-borrow, and also the loophole most often discussed in naked-short-selling complaints.

Example: you request a 50,000 share locate. The desk confirms 18,000 at 65% and nothing beyond that. The short can only be sized to 18,000 shares regardless of how good the thesis is.

Related: regulation-sho, naked-short-selling, hard-to-borrow, easy-to-borrow, short-selling

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