Regulations

Each country sets restrictions and regulates short-selling in its markets. In the U.S., short selling is regulated by the U.S. Securities and Exchange Commission (SEC) under the Securities Exchange Act of 1934. Regulation SHO, implemented in 2005, is the primary rule governing short selling that mandates short sales can only be executed in a tick-up or zero-plus tick market, meaning the security price must be moving upward at the time of the short sale.

According to Regulation SHO, brokers must locate a party willing to lend the shorted shares, or they must have reasonable grounds to believe that the shares could be borrowed. This prevents naked short selling, where investors sell shares they have not borrowed.
2
The SEC can impose temporary short-selling bans on specific stocks under certain conditions, such as extreme market volatility.
3

In October 2023, the SEC added regulations requiring investors to report their short positions to the SEC and companies that lend shares for short selling to report this activity to FINRA.
4
These new rules come after increased scrutiny of short selling, particularly following the GameStop (GME) meme stock saga in 2021, when retail investors drove up the stock price, causing losses for hedge funds that had shorted the company.