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Key Takeaways
- Reg SHO applies its 10,000-share and 0.5% tests to reporting-company equity securities over five consecutive settlement days.
- Threshold status is published each trading day on the primary listing market’s SRO list, and on FINRA’s list for OTC names.
- The example’s 168,000 fails equal 0.7% of 24 million shares outstanding.
- Rule 204 forces a short-sale fail closed by the start of trading on the settlement day after settlement date, well before the 13-day Rule 203(b)(3) buy-in.
- FINRA Rule 4320 uses a 10,000-share and $50,000-value test for non-reporting threshold securities.
What is a threshold security?
A threshold security is an equity security with large, persistent fails to deliver that appears on an SRO’s threshold list. Regulation SHO covers equity securities of reporting issuers. Its quantity tests are at least 10,000 aggregate fails and at least 0.5% of shares outstanding across five consecutive settlement days.
For non-reporting threshold securities, FINRA Rule 4320 sets its own test: 10,000 aggregate fails and a $50,000 value test.
Formula
Threshold security when aggregate fails to deliver ≥ 10,000 shares AND aggregate fails to deliver ≥ 0.005 × shares outstanding, on five consecutive settlement days, and the security appears on an SRO disseminated list- Aggregate fails are measured at a registered clearing agency across all participants, not broker by broker or account by account.
- The denominator is the issuer reported total shares outstanding rather than free float, so the percentage test binds far more easily on a small share count.
- The issuer must be registered under Section 12 of the Exchange Act or required to file reports under Section 15(d).
- The security ceases to be a threshold security once the aggregate fail position stays under that level for five consecutive settlement days.
Threshold security example: 168,000 fails on 24 million shares
XYZ is a reporting issuer with 24,000,000 shares outstanding. Aggregate fails to deliver at the registered clearing agency reach 168,000 shares and hold there. One clearing participant carries 60,000 shares of that aggregate fail position.
- Shares outstanding: 24,000,000
- Percentage-test level: 24,000,000 × 0.005 = 120,000 shares
- Aggregate fails: 168,000 shares
- Fail percentage: 168,000 / 24,000,000 × 100 = 0.7%
- Both quantity tests hold on five consecutive settlement days
- One participant’s share of the aggregate fail: 60,000 shares
The 168,000-share aggregate exceeds both Reg SHO quantity tests on all five days, so XYZ qualifies for the SRO’s threshold list. The participant carrying 60,000 shares runs its own close-out clock: Rule 204 first, then the 13-day Rule 203(b)(3) buy-in if the fail persists.
XYZ has 24 million shares outstanding. Half a percent is 120,000 shares. Its 168,000 aggregate fails equal 0.7%, exceeding both Reg SHO quantity tests on all five days.
One participant carries 60,000 shares of that aggregate. The 168,000 puts XYZ on the list; the 60,000 sets that participant’s own close-out obligation.
Close-out rules: Rule 203(b)(3) and Rule 204
Rule 203(b)(3) requires a close-out purchase once a participant’s fail in a threshold security persists for 13 consecutive settlement days, or 35 for securities sold under Rule 144. Until the participant closes out, it must pre-borrow before any short sale in that security.
Rule 204 runs a separate, earlier clock. An ordinary short-sale fail must close by the start of regular trading on the settlement day following settlement date. Documented long-sale and bona fide market-making fails get until the start of regular trading on the third consecutive settlement day following settlement date.
How to track a stock on and off the threshold list
Use the primary listing SRO’s dated files for listed securities and FINRA’s lists for OTC securities. Count consecutive appearances across files. Nasdaq’s standard fields identify the symbol, name, market category and threshold flags.
The removal test also uses five consecutive settlement days. Read the published status against the rule’s exit conditions and keep the participant’s own fail history separate.
Threshold status, short interest and borrow conditions
The threshold list measures unsettled delivery obligations, while short interest counts open short positions. Combine settlement status with short interest, hard-to-borrow terms and completed market activity: settlement status says delivery is breaking down, short interest sizes the short side, borrow terms price it, and the tape shows whether buyers are pressing.
Limitations of the threshold list
- Pair the list with short interest and the borrow fee before any squeeze trade. The list counts delivery failures; those two numbers size and price the short side.
- Treat a listing as a settlement problem first. Long-sale delivery delays, share conversions, exchange-traded fund creation mechanics and operational breaks all create fails, alongside unlocated short selling.
- The percentage test uses total shares outstanding rather than float, so it binds far more easily on a small share count: XYZ crosses it at 120,000 failed shares.
- Count consecutive days, not single appearances. The lists publish each trading day, and a name can appear and disappear repeatedly without any change in the size of the short position.
- The flag covers the whole security. XYZ lists on its 168,000 aggregate fails, while the participant carrying 60,000 shares runs its own close-out clock.
Bottom line
A threshold security has a large, persistent settlement-fail problem, flagged on a published SRO list after five consecutive settlement days. Read the status as evidence of unsettled delivery, then check borrow terms and short interest before you trade a direction from it.
Clear answers
Frequently Asked Questions
Sources and Further Reading
- SEC: Key Points About Regulation SHO
- SEC Division of Trading and Markets: Responses to Frequently Asked Questions Concerning Regulation SHO
- Cboe: U.S. Equities Regulation SHO Threshold Securities
- Nasdaq Trader: Regulation SHO Threshold Securities
- FINRA Rule 4320: Short Sale Delivery Requirements
- SEC: Amendment to Regulation SHO to Adopt Exchange Act Rule 204, Small Entity Compliance Guide
- SEC Release 34-55970: Regulation SHO and Rule 10a-1 (elimination of the grandfather provision)
How entries are sourced, calculated and updated: editorial methodology.