Regulation SHO, adopted by the SEC in January 2005, sets forth the regulatory framework governing short sales.  Two key provisions, intended to address problems associated with persistent fails to deliver and potentially abusive naked short selling, involve locate and close-out requirements.

Under the locate requirement, a broker-dealer must have reasonable grounds to believe that the security can be borrowed so that it can be delivered on the delivery due date before effecting a short sale order.  

The close-out requirement requires that the clearing broker take immediate action to close out a fail to deliver position in a threshold security that has persisted for 13 consecutive settlement days by purchasing securities of like kind and quantity. Until the position is closed out, the broker may not effect further short sales in that threshold security without borrowing or entering into a bona fide agreement to borrow the security (known as the "pre-borrowing" requirement)

IMPORTANT NOTE:

In October 2008, the SEC amended Regulation SHO with temporary Rule 204T (in place until July 31, 2009) which requires that any broker having a fail to deliver position at NSCC on the settlement date immediately borrow or purchase securities to close out the amount of the fail to deliver position by no later than the beginning of regular trading hours on the following settlement date (the “Close-Out Date”). This close-out requirement requires that the broker take affirmative action to purchase or borrow securities and not offset the fail to deliver position with shares it will receive on the Close-Out Date. Rule 204T applies to all securities not just threshold securities.

Procedurally, to sell short, all you need to do is specify your order Action as 'Sell' at the point you create your order. Note that we do not allow you to be both long and short the same security, so if you maintain a long position and enter a sell order, you will close out any long positions to the extent of your sell order and open a short position to the extent, if any, your sell order exceeds a long position. Please note that you must maintain a "Margin" type account with net liquidating equity of at least USD 2,000 for a short sale order to be accepted. Short sales are not allowed in "Cash" type accounts.

Also note, that in addition to your account having sufficient equity to meet the margin requirement associated with the transaction, IBKR is required to meet its regulatory obligation of making a reasonable determination that we can locate the stock for borrowing purposes when the transaction settles (typically T+2). If we are unable to locate the stock based upon our inventory and the availability lists provided to us by other brokers, you will see an Order Status color in the TWS Shortable column of dark green. This indicates that there are no shares available to sell at the moment and that the system is searching for shares. The order will remain in this status until the we are able to locate the shares or the time which you specify for your order to remain in force expires, whichever occurs first. You may wish to review the Shortable Stocks link to our website below which provides a listing of stocks available for shorting. A list of shortable stocks searchable by symbol or CUSIP along with their indicative borrow rates may be found through the Short Stock Availability Tool accessible through the Tools link within Client Portal.

Finally, you should be aware that one of the risks of borrowing stock to support your short sale is being bought in with little or no notice. Even though a reasonable determination that the shares can be borrowed will be made prior to effecting your sale transaction, there is no assurance that those shares will actually be available at the time of settlement or any day thereafter. The supply and demand of borrowable inventory for any given security is dynamic by nature and regulations require brokers to force-close any short position having a delivery obligation subject to fail with the clearinghouse on any given day. We will make every effort to provide you with advance notice if this appears to be the case in order to provide you with the opportunity to buy in your own position, however, this is done on a best-efforts basis. Other risks to keep in mind are the special charges which tend to be associated with hard-to-borrow securities that, in aggregate may exceed any rebate or interest paid on the short stock proceeds, as well as your obligation to pay to the lender any dividends which are paid throughout the duration of the loan period.