What is 'Short Exempt'

Short exempt refers to a short sale order exempted from the uptick rule regulated under the Securities and Exchange Commission’s (SEC) Regulation SHO.

BREAKING DOWN 'Short Exempt'

Short exempt orders are short sale orders that receive exemption from the SEC’s 2010 modified uptick rule. The SEC implemented Regulation SHO in 2005 and modified rules regarding short selling orders in 2010.

Regulation SHO is a legislation overseen by the SEC which includes rules for short sell trading strategies. Its primary goal is to help ensure the liquidity of securities involved in a short sell for full execution. This type of trade is associated with high risk because of the borrowing utilized in the flow of short selling.

Short Selling

Short selling typically refers to an exchange of securities through a broker on margin. Broker-dealers loan securities to clients for the purpose of short selling. Broker-dealer short selling will have various stipulations that must be followed and can be complex for an investor. Generally the broker-dealer will transact these securities for the client for the purpose of short selling which requires the transaction to include short or short exempt markings.

Regulation SHO

In 2010 the SEC modified Rules 200(g) and 201 of Regulation SHO to loosen the constraints on short selling. The prior rule allowed an investor to only partake in short selling when the underlying security experienced an uptick. New 2010 rules modified this regulation to only stopping short selling on a security when the underlying security decreased by 10% or more from the previous day’s closing price. This ruling is now effected from the time of the decrease to the next closing day. This ruling is required to be maintained by all U.S. exchanges.

Standard market procedures require all security trade orders to be marked long, short or short exempt. The short exempt marking was added under the 2010 modifications. Thus, an order to buy is marked long and an order that complies with Regulation SHO is marked short. A short sell order marked as short exempt is an order that is being transacted beyond normal procedures under Regulation SHO.

Broker-dealers can mark an order short exempt if they believe it qualifies for an exception. The primary exception is the use of non-standard pricing quotes for trade execution. Marking for these orders is signified by SSE. All orders marked SSE will be closely checked by self-regulatory organizations and the SEC for compliance with Regulation SHO exceptions.

  1. Short Covering

    Short covering is buying back borrowed securities in order to ...
  2. Uptick Rule

    The Uptick Rule is a former law established by the SEC that requires ...
  3. Short Interest

    Short interest, an indicator of market sentiment, is the amount ...
  4. Net Short

    Net short is a portfolio or trading position leveraged to an ...
  5. Firm Order

    A firm order may be referred to as an order for a trade from ...
  6. Short Sell Against the Box

    A short sell against the box refers to the act of short selling ...
Related Articles
  1. Investing

    Short selling basics

    Short sellers enable the markets to function smoothly by providing liquidity and also serve as a restraining influence on investors’ over-exuberance.
  2. Investing

    Why Short Sales Are Not For Sissies

    Short selling has a number of risks that make it highly unsuitable for the novice investor.
  3. Financial Advisor

    Why You Should Never Short a Stock

    Short selling a stock means you are betting on the stock decreasing in price. Before taking on this investment, you should fully understand the risks
  4. Trading

    How To Protect A Short Position With Options (FB, AAPL)

    Short selling can be a risky endeavor, but the inherent risk of a short position can be mitigated significantly through the use of options.
  5. Financial Advisor

    What Is A Short ETF?

    A short ETF will be profitable if the underlying index or asset declines in price, and will incur a loss if the underlying index or asset gains in price.
  1. What kinds of restrictions does the SEC put on short selling?

    Learn about the rules and regulations on short selling enforced by the U.S. Securities and Exchange Commission, or SEC, including ... Read Answer >>
  2. Why do you need a margin account to short sell stocks?

    The reason that margin accounts and only margin accounts can be used to short sell stocks has to do with Regulation T, a ... Read Answer >>
  3. What is the difference between a short squeeze and short covering?

    Learn about short covering and short squeezes, the difference them and what causes short squeezes. Read Answer >>
  4. Can you short sell stocks that are trading below $5? My broker says that I can't.

    Short selling can be very risky for both the investor and the broker. Brokers will often tell investors that only stocks ... Read Answer >>
Hot Definitions
  1. Futures Contract

    An agreement to buy or sell the underlying commodity or asset at a specific price at a future date.
  2. Yield Curve

    A yield curve is a line that plots the interest rates, at a set point in time, of bonds having equal credit quality, but ...
  3. Portfolio

    A portfolio is a grouping of financial assets such as stocks, bonds and cash equivalents, also their mutual, exchange-traded ...
  4. Gross Profit

    Gross profit is the profit a company makes after deducting the costs of making and selling its products, or the costs of ...
  5. Diversification

    Diversification is the strategy of investing in a variety of securities in order to lower the risk involved with putting ...
  6. Intrinsic Value

    Intrinsic value is the perceived or calculated value of a company, including tangible and intangible factors, and may differ ...
Trading Center