FINRA Series 7Processes and Confirms TransactionsHard
XYZ common stock closes today at $18.00, down from yesterday's close of $20.25, a decline of approximately 11%. This triggers the Reg SHO short sale price test circuit breaker. For the remainder of the day and the following trading day, short sale orders in XYZ are restricted to which condition?
- AShort sales are prohibited entirely for two trading days
- BShort sales require an uptick from the previous reported trade price
- CShort sales may be executed only at a price above the current national best bid
- DShort sales require a locate but face no price restriction
Show answer & explanationAnswer & explanation
Correct answer: C. Short sales may be executed only at a price above the current national best bid
Reg SHO Rule 201 is triggered when a covered security declines 10% or more from its prior day's closing price; once triggered, short sales are restricted to prices above the current national best bid for the remainder of that day and the following trading day.
Why the other options are wrong
- A. Rule 201 restricts price, it does not ban short selling outright.
- B. The old 'tick test' compared to the last sale price was the pre-2010 rule; the current rule uses the national best bid.
- D. Locate requirements exist separately under Reg SHO Rule 203 but don't replace the price restriction once triggered.
Reg SHO Rule 201 (Circuit Breaker)
A short sale price test triggered when a covered security's price declines 10% or more from the prior day's closing price, restricting short sales to above the current best bid.
- Trigger: intraday decline of 10%+ from prior close
- Restriction lasts remainder of day plus next full trading day
- Short sales permitted only above the current national best bid
Memory trick: Drop 10%, ring the bell, shorts must clear the bid.