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Why did I receive a Reg SHO Rule 204 notice?

In simple terms:
You received this notice because your short position may not have shares available to borrow, creating a risk of a “failure to deliver.” The rule requires brokers to act quickly in these situations, so we notify you to give you the chance to adjust your position before restrictions apply.

The detail:
Regulation SHO Rule 204 is the Close-out Requirement, which requires brokers and dealers that are participants of a registered clearing agency to close out any “failure to deliver” (FTD) positions. Under Rule 204(a), an FTD must be closed out by borrowing or purchasing the securities no later than the start of regular trading hours on the following settlement day.

If you actively day trade and frequently hold short positions, you may be at risk of an FTD if TradeZero or its clearing firm is unable to borrow the shares. To make this process transparent, we request information from our clearing house before the close of business to identify any positions at risk of FTD. We then notify affected clients by email so they can decide whether to maintain or exit the position.

Rule 204(b) provides that if a clearing house does not close out an FTD in accordance with Rule 204(a), then the clearing house—and any broker-dealer that clears through it—may not accept new short sale orders in that security unless the shares have first been borrowed or a bona fide borrowing arrangement has been made. To help clients avoid this restriction, TradeZero informs them in advance of any potential FTD.

As a general rule of thumb, stocks with a small float or high short interest are more likely to trigger FTDs, and therefore Reg SHO Rule 204 notices, than stocks with a larger float and lower short interest. It is important to understand these rules when making trading decisions.

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