In olden days a short sale could only be executed at a price that was higher than the previous price for the security, or at the same price if the price before had been an "uptick." Reg SHO now requires that before executing a short sale, broker-dealers have to locate the securities so that the laws of supply and demand are not distorted by "naked short selling" in which people sell stock that doesn't even exist short, artificially depressing its price. If the broker-dealer executes a short sale without reasonably believing the shares can be delivered by the lender, they have violated the rule.
In May 2010 Reg SHO is being updated to impose a temporary version of the old uptick rule that applies when a "circuit breaker" is tripped for a particular security. Starting in May, if a security drops during the day by 10% or more below its most recent closing price, short sellers will not be able to sell short at or below the current best bid price for the security. In other words, people “selling long,” which means selling the shares they own, will have priority and will be able to liquidate their holdings before short sellers can jump onto the pile. As the SEC states in their unique brand of English: a targeted short sale price test restriction will apply the alternative uptick rule for the remainder of the day and the following day if the price of an individual security declines intra-day by 10% or more from the prior day’s closing price for that security. By not allowing short sellers to sell at or below the current national best bid while the circuit breaker is in effect, the short sale price test restriction in Rule 201 will allow long sellers, who will be able to sell at the bid, to sell first in a declining market for a particular security. As the Commission has noted previously in connection with short sale price test restrictions, a goal of such restrictions is to allow long sellers to sell first in a declining market. In addition, by making such bids accessible only by long sellers when a security’s price is undergoing significant downward price pressure, Rule 201 will help to facilitate and maintain stability in the markets and help ensure that they function efficiently. It will also help restore investor confidence during times of substantial uncertainty because, once the circuit breaker has been triggered for a particular security, long sellers will have preferred access to bids for the security, and the security’s continued price decline will more likely be due to long selling and the underlying fundamentals of the issuer, rather than to other factors.