Threshold List

What Is a Threshold List?

A threshold list, also known as a Regulation SHO Threshold Security List, is a list of securities whose transactions failed to clear for five consecutive settlement days at a registered clearing agency.

Threshold lists are published in accordance with regulations set by the Securities and Exchange Commission (SEC). Regulators review this information as part of their efforts to detect market manipulation.

Key Takeaways

  • A threshold list is a list of securities whose transactions failed to settle for five consecutive settlement days.
  • Threshold lists are published by various exchanges by SEC regulations.
  • Settlement failures may be indicative of improper naked short selling.
  • Administrative errors may also cause settlement failures.
  • The SEC adopted Regulation SHO to address failures in delivering securities within the two-day settlement period, promote market stability, and prevent the erosion of investor confidence in financial markets.

Understanding Threshold Lists

In January 2005, the SEC implemented Regulation SHO to reduce the abuse of naked short selling, where the seller does not borrow or arrange to borrow the securities in time to make delivery to the buyer within the standard two-day settlement period. As a result, the seller fails to deliver securities to the buyer when delivery is due, known as a "failure to deliver" or "fail."

When naked short selling is used and the affected securities aren't delivered, the associated transactions will fail to clear. These failed transactions are reported regularly on a threshold list, and the SEC and other regulators can identify clues that improper naked short selling may have occurred.

Threshold lists can be freely accessed by the public through websites maintained by the Nasdaq Stock Market (NASDAQ), the New York Stock Exchange (NYSE), the Better Alternative Trading System (BATS), and the Financial Industry Regulatory Authority (FINRA).

In order to appear on a threshold list, the security must be registered with the SEC and fail to settle for five or more consecutive days. The failed settlements must also involve a transaction size totaling 10,000 shares or more, or at least 0.5% of the security's shares outstanding. Securities that meet these criteria and are included on the list are known as threshold securities.

There are also legitimate reasons why a security may appear on a threshold list. Although some of these failures may be due to inappropriate naked short selling, they may also be caused by technical anomalies, human error, or legitimate lags in the time-consuming efforts of market makers to obtain securities for delivery. The securities on the threshold list should not automatically be viewed as suspicious.

Naked short selling is a trading practice, but regulators seek to prevent its use for illegitimate purposes, such as to drive down the price of a stock.

Example of a Threshold List

In June 2022, a snapshot of Nasdaq's threshold list reveals threshold securities that trade on its exchange:

  • Aeroclean Technologies Inc (AERC)
  • Applied UV Inc (AUVI)
  • Beyond Meat Inc (BYND)

Although the list does not specify the cause of the failed settlements, it does provide regulators with a starting point from which to research the source of the failures.

When Is a Security Removed From the Threshold List?

A security ceases to be a Threshold Security and is removed from the list when it does not meet the threshold requirements for five consecutive settlement days.

Who Uses Threshold Lists?

Financial industry regulators examine the threshold lists published by self-regulating entities such as Nasdaq, New York Stock Exchange, and registered clearing agencies. While there can be legitimate reasons why a trade fails to settle, regulators try to detect signs of illegitimate naked short-selling practices in these lists. Threshold lists are also available to the public for inspection.

What Does Trade Settlement Mean?

Settlement of trade refers to the completion of a trade transaction. Funds for the transaction are paid by the buyer and received by the seller. Any required securities have been delivered. Positions have been recorded in investors' accounts. The settlement date is the specific day by which payment must be made. For stocks, the settlement date is two days after the trade date (T+2).

Article Sources
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  1. U.S. Securities and Exchange Commission. "Naked Short Sales."

  2. U.S. Securities and Exchange Commission. "Key Points About Regulation SHO."

  3. NasdaqTrader.com. "Nasdaq Regulation SHO Threshold List."

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