Why did I receive Reg Sho 204 notice?

Regulation SHO Rule 204 is the Close-out Requirement that requires brokers and dealers that are participants of a registered clearing agency to take action to close out “failure to deliver” positions.

Under Rule 204(a) of Regulation SHO, all “failure to deliver” purchases must be closed out by borrowing or purchasing securities no later than the start of regular trading hours on the following settlement date.

If you day trade a security and consistently hold a short position, then you are consistently net short the security and are at risk of a “failure to deliver” if TradeZero America or its clearing firm cannot borrow the securities.

TradeZero tries to make this process as transparent as possible. We request from our clearing house before close of business any client positions that are at risk of “failure to deliver”. We then send to those clients a notice via email so they can make a better decision whether to stay in the position or get out of the position.

Reg Sho Rule 204(b) states that if a clearing house does not close out its “failure to deliver” in an equity in accordance with Reg Sho Rule 204(a) then the clearing house and any broker dealer for which it receives trades for clearance and settlement may not accept short sale orders from its customers in that equity without first borrowing the security or entering into a bona fide arrangement to borrow the stock. To avoid this, TradeZero takes the extra step to inform its clients of any potential “failure to deliver.”

As a rule of thumb, stocks that have a small float or have a large short interest are more at risk of a “failure to deliver” resulting in receiving a Reg Sho Rule 204 notice than stocks that have a large float and small short interest. It is important to be an educated trader and understand the rules that may affect your decision making.

For more information visit:
https://www.sec.gov/divisions/marketreg/mrfaqregsho1204.htm
https://www.sec.gov/investor/pubs/regsho.htm