The short sale restriction, known formally as Rule 201 of Regulation SHO, is an SEC circuit breaker that kicks in when a stock drops 10% or more below its previous day’s closing price. It doesn’t ban short selling. It forces short sale orders to be priced above the current best bid, which takes away a short seller’s ability to push the price down by hitting bids during a selloff. Once triggered, the restriction stays in place for the rest of that trading day and all of the next.
What Triggers the 10% Rule
The circuit breaker fires automatically the moment a stock trades 10% or more below its previous day’s closing price, as set by its listing exchange. Exchange systems watch the threshold continuously, and no human action is needed to switch the restriction on.
Only trades during regular market hours count. Regular hours run from 9:30 a.m. to 4:00 p.m. Eastern Time under Regulation NMS, so a stock that gaps down 12% at 7:00 a.m. in pre-market is not yet restricted. The restriction turns on only when a trade during the regular session prints at or below the 10% threshold on the consolidated tape, which combines price data from every exchange where the stock trades.1U.S. Securities and Exchange Commission (SEC). Division of Trading and Markets: Responses to Frequently Asked Questions Concerning Rule 201 of Regulation SHO
This matters in practice. A stock can trade well below the trigger in pre-market and then open back above it. In that case, no restriction applies unless the price drops 10% again from the prior close during regular hours. Assuming a pre-market crash automatically triggers the rule is a common way to miscalculate exposure.
How the Price Test Changes Your Short Order
Once the breaker trips, trading centers must block any short sale order from executing at a price less than or equal to the current national best bid. You can still short the stock. The order just has to be priced above the highest price any buyer is currently offering across all exchanges.2eCFR. 17 CFR Part 242 – Regulation SHO – Regulation of Short Sales
If the best bid sits at $50.00, a short sale order at $50.00 gets blocked. The order has to be priced at $50.01 or higher. That pushes short sellers into a passive role where they’re offering liquidity to buyers instead of taking it. Market makers and automated systems check the restriction status before processing any order marked as a short sale, and orders that fail the price test get rejected.
This is called the alternative uptick rule, and it works differently from the original uptick rule the SEC rescinded in 2007. The old rule compared the short sale price to the last trade. The current rule ignores the last sale entirely and looks only at the bid side of the order book. The best bid can move independently of the last trade price, especially in fast markets, so the two tests can produce different outcomes on the same order flow.
One wrinkle helps limit orders. A short sale order displayed at a price above the national best bid when first entered can still execute even if the bid later rises to meet it. The rule evaluates the order at the time of initial display, not at the moment of execution.
Short Exempt Orders
Not every short sale during a restriction has to clear the price test. Regulation SHO requires brokers to mark every equity sell order as “long,” “short,” or “short exempt.” An order marked “short exempt” can execute at or below the national best bid even while the breaker is active.3eCFR. 17 CFR 242.200 – Definition of Short Sale and Marking Requirements
The SEC allows the “short exempt” marking in a handful of narrow situations:4U.S. Securities & Exchange Commission. Small Entity Compliance Guide: Short Sale Price Test Restrictions
- The seller actually owns the stock but faces a temporary delay in delivering it and intends to deliver as soon as that restriction lifts.
- Odd-lot transactions below the standard round lot size.
- Domestic and international arbitrage, where the short position is offset by a long position in a related security.
- Over-allotments and lay-off sales tied to underwriting activity.
- Volume-weighted average price (VWAP) transactions executed against a VWAP benchmark rather than a specific limit price.
- Riskless principal transactions, where a broker-dealer fills a customer’s buy order by selling short as principal and allocates the offsetting transaction within 60 seconds, with written procedures confirming the customer order came first.
Market making is not on that list. The SEC chose not to exempt market makers when it adopted Rule 201, so designated market makers on the NYSE and Nasdaq face the same price test as everyone else during a restriction.
How Long It Lasts
Once triggered, the restriction runs for the rest of that trading day and the entire next trading day, including pre-market and after-hours sessions on the following day. A stock that trips the breaker on Monday afternoon stays restricted through Tuesday’s close.2eCFR. 17 CFR Part 242 – Regulation SHO – Regulation of Short Sales
It can also re-trigger. If a stock is already under the restriction and drops another 10% from the prior day’s close during the second day, the clock resets and the restriction extends through the end of the third day. There is no limit on how many times a stock can re-trigger, so a stock in a prolonged freefall could remain restricted for a week or longer.1U.S. Securities and Exchange Commission (SEC). Division of Trading and Markets: Responses to Frequently Asked Questions Concerning Rule 201 of Regulation SHO
Which Stocks Are Covered
Rule 201 covers stocks listed on a national securities exchange and traded through the National Market System. Virtually every common stock on the NYSE and Nasdaq qualifies, including most large-cap and mid-cap equities.5U.S. Securities & Exchange Commission. SEC Approves Short Selling Restrictions – 2010-26
Exchange-traded funds are also covered. The SEC declined to create a general ETF exemption, reasoning that diversified ETFs would rarely hit the 10% threshold anyway. When one does, the same price test applies.1U.S. Securities and Exchange Commission (SEC). Division of Trading and Markets: Responses to Frequently Asked Questions Concerning Rule 201 of Regulation SHO
Securities that trade only over-the-counter or on the pink sheets generally fall outside the rule, since they’re not listed on a national exchange and not part of the NMS. If you trade mostly in penny stocks or other OTC names, the circuit breaker won’t apply to those positions.
How to Check if a Stock Is Restricted
Exchanges publish daily lists of restricted stocks. Nasdaq posts its Short Sale Circuit Breaker file on the Nasdaq Trader website, updated each trading day with the trigger data.6Nasdaq Trader. Short Sale Circuit Breaker The NYSE publishes a similar list through its data portal. Both files are free and show the security name, trigger date, and trigger price.
Most retail brokerage platforms also flag restricted securities on the order entry screen. If you try to submit a short sale on a restricted stock, the platform will either warn you about the price test or adjust the order type. Some brokers display an “SSR” indicator next to the stock symbol. Checking the circuit breaker list before placing a trade on a stock that dropped sharply the day before saves you from rejected orders and execution delays.