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Understanding the Regulation SHO Threshold Security List

Updated: Feb 18


Investing in the stock market involves more than simply buying and selling shares. To invest successfully, you need a deep understanding of the market, its tools, and mechanisms. One such tool often overlooked by investors, particularly those new to the market, is the "Threshold List".



What is a Threshold List?


A Threshold List, also known as a Regulation SHO Threshold Security List, is a list of securities published by major stock exchanges like the New York Stock Exchange (NYSE) and NASDAQ. The list includes securities for which there is a significant number of 'failures to deliver' shares at a clearing agency. Failure to deliver refers to a situation where one party in a trading contract does not deliver on their obligation, either the payment or the security, by the settlement date. This often occurs due to a short sale, where an investor borrows shares to sell, betting that the price will drop and they can buy them back cheaper. To make it to the Threshold List, a security must have had five consecutive settlement days with failures to deliver of at least 10,000 shares or 0.5% of its outstanding shares. Once a security is on the list, it remains there until it has five consecutive settlement days without a failure to deliver.


Why is the Threshold List Important?


The Threshold List is an essential tool for investors, primarily because it serves as an indicator of market manipulation and can reveal potential investment risks. For example, "naked short selling" is a type of market manipulation where an investor short-sells shares that they have not borrowed. This can artificially deflate the price of a stock and cause significant harm to the company in question. A high number of failures to deliver can indicate naked short selling, leading to a security's inclusion on the Threshold List. Understanding the Threshold List and tracking the securities that appear on it can provide investors with insights that help to guide their investment strategies.


Examples of Threshold List Usage


Example 1: Tracking Short Squeeze Opportunities: A notable example of Threshold List usage is for tracking potential short squeeze opportunities. A short squeeze happens when a heavily shorted stock starts to increase in price, and short sellers scramble to cover their positions by buying the stock, driving the price up even further. GameStop's short squeeze in early 2021 is a textbook example of this phenomenon. An investor could look at the Threshold List for stocks that are heavily shorted and therefore could potentially be subject to a short squeeze. This is by no means a guaranteed strategy, as many other factors influence whether a short squeeze will occur, but it is a tool in the investor's toolbox.


Example 2: Identifying Market Manipulation: Another example involves identifying potential instances of market manipulation. If an investor notices that a particular stock appears frequently on the Threshold List, it may be a sign that the stock is being manipulated, possibly through naked short selling. For example, if a smaller, less liquid company suddenly appears on the list, it might indicate that its shares are being manipulated. Investors can then dig deeper to confirm if this is the case and take their findings into account when deciding whether to invest in the company.


While the Threshold List might not be the most well-known tool among investors, its importance cannot be understated. It provides crucial information about securities that are failing to deliver, allowing investors to identify potential instances of market manipulation and uncover investment opportunities. As with all investment strategies, however, it's important to use the Threshold List as just one of many tools in your investment arsenal. Always do your own research and consider your risk tolerance and investment goals before making any investment decisions.

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