General Securities Sales Supervisor (Series10) Practice Exam

Regarding short selling a stock under Regulation SHO that has a circuit breaker, which statement is TRUE?

1. The broker-dealer cannot short the stock

2. The broker-dealer can only short the stock if it marks the order ticket "short exempt"

3. The broker-dealer can only short the stock if the sale is made at a price higher than the current national best bid

4. Both choices B and C above

The correct answer is: Both choices B and C above

In the context of short selling a stock that has an active circuit breaker under Regulation SHO, the correct statement emphasizes that there are specific conditions under which a broker-dealer can execute such trades. When a stock encounters a circuit breaker, which is a mechanism designed to prevent excessive volatility, regulations are put in place to ensure stability in the market. One important aspect is that if a broker-dealer wishes to short sell that stock, they have to adhere to certain conditions, particularly when the circuit breaker is in effect. Marking the order ticket "short exempt" can be crucial in these situations. This marking is used to indicate that the short sale is permissible despite the current restrictions, which is an important regulatory requirement. Additionally, there is the requirement that any short sale must occur at a price higher than the prevailing national best bid. This rule is intended to prevent further downward pressure on the stock’s price during periods of market volatility. Therefore, both conditions must be satisfied to comply with the regulation, making the choice that states both requirements are necessary correct. This comprehensive understanding of Regulation SHO and circuit breaker rules is essential for ensuring compliance in securities transactions.