Locate (finance)
Encyclopedia
In finance
Finance
"Finance" is often defined simply as the management of money or “funds” management Modern finance, however, is a family of business activity that includes the origination, marketing, and management of cash and money surrogates through a variety of capital accounts, instruments, and markets created...

, a locate refers to an approval from a broker
Broker
A broker is a party that arranges transactions between a buyer and a seller, and gets a commission when the deal is executed. A broker who also acts as a seller or as a buyer becomes a principal party to the deal...

 that needs to be obtained prior to effecting a short sale in any equity
Stock
The capital stock of a business entity represents the original capital paid into or invested in the business by its founders. It serves as a security for the creditors of a business since it cannot be withdrawn to the detriment of the creditors...

 security, i.e. to "locate" securities available for borrowing.

The requirement, in the United States, to locate a stock before 'shorting' it has existed for a long time.

Regulation SHO was announced by the SEC
United States Securities and Exchange Commission
The U.S. Securities and Exchange Commission is a federal agency which holds primary responsibility for enforcing the federal securities laws and regulating the securities industry, the nation's stock and options exchanges, and other electronic securities markets in the United States...

 in July 2004. The rule includes a uniform "locate" requirement for short sales in all equity securities and a requirement for the firms to document what they have done to locate the securities. Regardless of whether the seller’s short position may be closed out by purchasing securities the same day, firms will need to document that they have borrowed or arranged to borrow the stock, or they have reasonable grounds to believe they can borrow the stock and deliver on delivery date.


Market makers effecting short sales in connection with bona fide market making are exempt from this requirement. In addition broker-dealers can rely on "easy to borrow
Easy to borrow
In securities lending, securities are classified by their availability to be borrowed. Highly liquid securities are considered "easy"; these products are easily found on the market should someone decide to borrow them for the purpose of selling them short. Securities that are illiquid in the market...

" lists to satisfy the "reasonable grounds" requirement, provided the information used to generate such lists is less than 24 hours old and the securities included on the list are so readily available that it is unlikely the seller will fail to deliver securities on settlement date, but may not rely on the fact that a security is not on a “hard-to-borrow” list to satisfy the test.



Each short sale must be matched to a corresponding locate. However, it is not necessary to secure a locate in the same broker - if a short sale purchaser can prove a secured locate at any broker that is sufficient to provide validity of a short sales transaction.



Since a locate is not a guarantee that security can be borrowed, there exists a threat there may not actually be actual securities that can be borrowed, resulting in so-called naked short
Naked short selling
Naked short selling, or naked shorting, is the practice of short-selling a financial instrument without first borrowing the security or ensuring that the security can be borrowed, as is conventionally done in a short sale. When the seller does not obtain the shares within the required time frame,...

. These can be extremely dangerous to the market and can unnecessarily bring down prices. Responding to such threat, in July 2008 SEC issued an emergency ruling where locates for certain securities had to be backed up by a guaranteed pre-borrow
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