US Reg SHO Short Sale Locate Requirements

When to Use

Use this skill when building or auditing the pre-trade gate that sits between an equity strategy and a US execution venue, under SEC Regulation SHO (17 CFR 242.200-204).

It provides mechanisms to:

• Validate Rule 200(g) order markings, and require a named statutory basis whenever an order is marked SHORT_EXEMPT — the marking is permissible only where 242.201(c) or 242.201(d) is satisfied.
• Enforce Rule 203(b)(1) locate verification before a short sale reaches a venue, checking locate identity, symbol alignment, expiry, and remaining capacity, then reserving the capacity against the order so it cannot be spent twice.
• Enforce the Rule 201 short sale price test while a restriction is in force: a SHORT order in a covered security must be priced strictly above the current national best bid (242.201(b)(1)(i)).
• Produce an auditable decision record for every order the gate sees, including rejections.

When NOT to Use

• As the marking decision itself. Deciding that a sale is "long" turns on ownership and deliverability under 242.200(a)-(f) — net long position, aggregation units, settlement-date deliverability. Those facts live in the books-and-records system. This engine validates the marking it is handed; it does not derive it, and it will pass a LONG order that was marked wrongly upstream.
• As the Rule 201 trigger. Under 242.201(b)(3) the listing market determines the 10% decline and makes it available under 242.603(b). The authoritative input is the SIP Reg SHO price test indicator. evaluate_local_trigger() is a staleness check on that feed, never a substitute for it.
• For securities outside Rule 201's scope. The price test applies to covered securities — NMS stocks as defined in 242.600(b)(65). Rule 200(g) marking and Rule 203(b)(1) locates reach equity securities generally, so do not assume the three rules share a universe.
• To claim a Rule 203(b)(2) locate exception. Broker-to-broker reliance, deemed ownership, and bona fide market making are deliberately not implemented. Claiming one is a documented firm decision with its own supervisory record, not something an order gate should infer.
• For Rule 204 close-out. Fails-to-deliver are a clearing-participant obligation measured from settlement date, handled in the clearing stack. See references/standards.md.

Prerequisites

• Python 3.10+ (standard library only).
• A prime broker / clearing firm locate feed (ETB and HTB) that supplies a locate identifier, symbol, quantity, and validity window. Reg SHO prescribes no locate lifetime — the TTL in this engine is firm policy, and industry practice is good-for-the-trading-day.
• The SIP Reg SHO short sale price test indicator (UTP and CTA) for Rule 201 state, plus a real-time NBBO feed for the price comparison itself.
• A supervisory procedure for SHORT_EXEMPT eligibility. 242.201(c) requires written policies reasonably designed to prevent an order being incorrectly identified as priced above the national best bid.

Workflow

1. Ingest locates. grant_locate(locate_id, symbol, quantity, lender_id, ttl_hours). A duplicate locate_id raises RegSHOError rather than overwriting: silently replacing a record resets quantity_used to zero and re-opens capacity already spent, which is exactly the double-count the gate exists to prevent.
2. Track Rule 201 state from the SIP. Call trigger_rule_201_ssr(symbol) when the price test indicator turns on and deactivate_rule_201_ssr(symbol) when it turns off. Leave effective_through unset unless you have an authoritative end time — Rule 201(b)(1)(ii) runs the restriction for the remainder of the trigger day and the following day, and a guessed trading calendar that lifts it early is a worse failure than one that lifts it late. Run evaluate_local_trigger(prior_close, last_trade_price) alongside as a feed-health check: a local 10% decline with no SIP flag means escalate, not override.
3. Gate the order. Pass an OrderIntent to validate_order_intent(). LONG passes with no locate. SHORT and SHORT_EXEMPT both require a locate — the Rule 201 marking does not reach Rule 203 (SEC Division of Trading and Markets, Rule 201 FAQ).
4. Read the decision, not the exception. The gate never raises on the order path; a structurally invalid order comes back as a non-compliant result so the rejection is logged. RegSHOError is raised only by registry administration (grant_locate, release_locate_reservation), where the caller is firm operations code.
5. Release what does not trade. An approval reserves locate capacity. If the order is cancelled, rejected by the venue, or lost to a session drop, call release_locate_reservation(order_id). Skipping this leaks capacity and blocks legitimate shorts for the rest of the locate's life. A genuinely new short sale needs a new order ID.
6. Archive. Every decision is appended to engine.audit_log with a timezone-aware timestamp, the locate status, and any short_exempt_reason. Persist it under the firm's books-and-records policy (see assets/checklist.md).

Common Pitfalls

• Retrying a pre-trade check and double-spending the locate. A timed-out or replayed validation for the same order must not reserve capacity twice. This engine remembers, by order_id, every decision that actually reserved capacity: a repeat returns that original decision and reserves nothing, and a repeat carrying different terms is rejected outright. Rejections are not remembered — they reserved nothing, so an order re-submitted once its cause is fixed is evaluated afresh rather than frozen at its first refusal.
• Letting NaN or a missing bid pass the price test. float("nan") <= nbb is False, so an unvalidated NaN price satisfies the Rule 201 comparison by default, and an nbb_price of 0.0 from a stale feed lets any positive price through. Both turn a market data fault into a silent compliance bypass. When the restriction is in force and no valid current national best bid is available, reject — the price test is defined against the bid and cannot be evaluated without one.
• Marking SHORT_EXEMPT for bona fide market making. Market making is a Rule 203(b)(2)(iii) locate exception, not a Rule 201 price-test exception. The only market-maker basis in Rule 201 is the narrow (d)(2) odd-lot exception. An order marked short exempt on a market-making rationale is a Rule 200(g)(2) marking violation.
• Treating "short exempt" as relief from the locate requirement. It is not. SEC staff have answered "No" to whether the short exempt marking may be used for an order qualifying for a Rule 203 locate exception; the two regimes are independent.
• Rebuilding the 10% trigger locally and trusting it. The listing market's determination is the compliance trigger. A locally computed decline will disagree at the margins — corporate action adjustments, the closing price the listing market actually publishes — and acting on it in the permissive direction shorts into a live restriction.
• Never releasing reservations. Locate pools that only ever decrease look conservative and then silently starve the desk. Reserve on approval, release on anything that is not a fill.
• Reusing a locate for a later short after covering intraday. Permitted only under the narrow conditions in SEC Reg SHO FAQ 4.4, and never for threshold or hard-to-borrow securities — a deficiency FINRA has specifically called out. Do not build it into the gate.
• Comparing prices at the epsilon. Sub-penny increments are not exactly representable in binary floating point. Bias the comparison toward rejection: a spurious rejection costs a fill, a spurious approval executes a prohibited short sale.

Verification

• Run python -m unittest discover -s skills/us-reg-sho-short-sale-locate-requirements/scripts from the repository root and confirm every test passes.
• Rule 200(g) marking: LONG needs no locate; SHORT without a locate is rejected; SHORT_EXEMPT with no named 242.201(c)/(d) basis is rejected, and one with a basis still requires a locate.
• Rule 203(b)(1) locate: an unknown locate id, a locate for a different symbol, an expired locate (checked against a fixed clock, including a naive prime-broker timestamp), and a quantity one share past remaining capacity are each rejected; the exact capacity boundary is approved.
• Rule 201 price test: with the restriction active, a SHORT priced at the national best bid is rejected, one above it is approved, and one within NBB_PRICE_EPSILON of it is rejected — the comparison is biased toward rejection.
• Fail-closed on market data: a missing, zero, negative, NaN or infinite national best bid rejects the order rather than passing it. A 242.201(c) claim is verified against the bid; a 242.201(d) basis bypasses the price test.
• Retry idempotency: re-validating the same order_id returns the original decision object and reserves locate capacity exactly once. A retry carrying a fresher NBBO tick (changed nbb_price, or nbo_price dropped) is still the same order — it is accepted, not rejected as a duplicate, and reserves nothing further. Market data is not part of the duplicate fingerprint.
• Order-id reuse: the same order_id with different terms (quantity, price, symbol, marking, locate, exempt basis) is rejected with Duplicate order_id, whether or not the NBBO moved, and reserves nothing. A previously rejected order_id may be re-submitted once its cause is fixed.
• Reservation lifecycle: releasing a reservation returns capacity to the locate pool, and a double release is refused.
• Restriction handling: the restriction is only cleared on an authoritative signal, and the local 10% decline check is advisory — it escalates on disagreement and never relaxes the gate.
• Confirm every gate decision, approval and rejection alike, lands in the audit log with a timezone-aware timestamp before sign-off against assets/checklist.md.

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