Threshold lists are published by exchanges to identify securities that have not settled for five consecutive days. These lists help detect potential improper naked short selling or administrative errors. The Securities and Exchange Commission (SEC) implemented Regulation SHO to address settlement failures within two days, promoting market stability and maintaining investor confidence.
Basics
A threshold list, also known as a Regulation SHO Threshold Security List, is a compilation of securities that have failed to clear transactions for five consecutive settlement days at a registered clearing agency. These lists are published under regulations set by the SEC and are utilized by regulators to detect potential instances of market manipulation.
Threshold Lists in a Nutshell
In 2005, the SEC introduced Regulation SHO to address naked short selling, which occurs when sellers fail to deliver securities to buyers within the standard two-day settlement period. These failures, known as "failures to deliver," result in transactions that do not clear.
To identify potential instances of improper naked short selling, the SEC and other regulators regularly publish threshold lists that include failed transactions. These lists can be accessed by the public on websites maintained by major entities like Nasdaq Stock Market (NASDAQ), New York Stock Exchange (NYSE), Better Alternative Trading System (BATS), and Financial Industry Regulatory Authority (FINRA).
For security to appear on a threshold list, it must be registered with the SEC and fail to settle for five or more consecutive days. The failed settlements must involve a transaction size of 10,000 shares or more or at least 0.5% of the security's outstanding shares. Securities meeting these criteria are referred to as threshold securities.
Exceptional Cases
Not all securities appearing on a threshold list should be automatically deemed suspicious. While some failures may be a result of inappropriate naked short selling, there are legitimate reasons for security to appear on the list. Technical anomalies, human error, and delays in market makers' efforts to obtain securities for delivery can also contribute to these failures. It is important to consider these factors and avoid hasty judgments when reviewing the securities listed. It is important to note that regulators aim to prevent the illegitimate use of naked short selling. This trading practice can be employed to artificially decrease the price of a stock.
Threshold List Examples
As of June 2022, Nasdaq's threshold list includes the following threshold securities:
- Aeroclean Technologies Inc (AERC)
- Applied UV Inc (AUVI)
- Beyond Meat Inc (BYND)
While the list does not provide details about the reasons behind the failed settlements, it serves as a valuable starting point for regulators to investigate the underlying causes of these failures.
How to Get Security Removed From the Threshold List
A security is taken off the Threshold Security list when it no longer meets the threshold requirements for five consecutive settlement days.
Who Is a User of Threshold Lists?
Financial industry regulators review threshold lists published by self-regulating entities like Nasdaq, New York Stock Exchange, and registered clearing agencies. These lists are accessible to the public as well. While legitimate reasons can account for trade settlement failures, regulators utilize the threshold lists to identify potential instances of illegitimate naked short-selling practices.
Definition of Trade Settlement
Trade settlement is the process of completing a trade transaction. It includes payment from the buyer to the seller, the delivery of securities, and the recording of positions in investors' accounts. The settlement date is the day by which payment must be completed, which is typically two days after the trade date for stocks (T+2).
Conclusion
The Threshold Securities List is an important tool for regulators to detect potential instances of market manipulation and improper naked short selling. While not all securities appearing on the list are necessarily suspicious, the list serves as a valuable starting point for regulators to investigate underlying causes of trade settlement failures. By identifying and addressing these issues, regulators promote market stability and maintain investor confidence.