Regulation SHO: What It Regulates & 2025 Updates for Aussie Investors

Short selling has become a hot topic for investors worldwide — especially with the rise of retail trading and global market volatility. For Australians looking to trade US stocks or simply understand global financial rules, Regulation SHO is a crucial piece of the puzzle. But what exactly is it, and how do its 2025 updates shape the trading landscape?

What Is Regulation SHO?

Regulation SHO is a set of US Securities and Exchange Commission (SEC) rules designed to regulate short selling — the practice of selling borrowed shares with the intention of buying them back at a lower price. Introduced in 2005, it aims to ensure fairness, transparency, and stability in US equity markets. While it’s an American regulation, its ripple effects are felt by global investors, including many Australians who access US markets via brokers or ETFs.

At its core, Regulation SHO targets two main issues:

• Preventing naked short selling: This occurs when traders sell shares without ensuring they can actually borrow them, potentially leading to failed settlements and market manipulation.
• Reducing settlement failures: Ensuring shares are delivered on time after a short sale, maintaining market integrity.

Regulation SHO is enforced by US exchanges and brokers, who must comply with its requirements or face severe penalties.

Key Components and 2025 Regulatory Updates

In 2025, several key updates have been proposed and implemented in the US to modernise Regulation SHO, reflecting lessons from recent market events such as the GameStop short squeeze and increasing use of algorithmic trading. Here’s what’s new and relevant:

• Enhanced Close-Out Requirements: If a broker fails to deliver shares within two settlement days after a short sale (known as a T+2 cycle), they must immediately close out the open position. In 2025, the SEC has tightened monitoring and reporting of these failures, requiring daily public disclosure by brokers.
• Stricter Locate and Affirmation Rules: Before executing a short sale, brokers must now provide explicit, auditable evidence that shares are available to borrow. This change is designed to reduce the likelihood of naked short sales slipping through the cracks.
• Transparency for Retail Investors: With the globalisation of trading apps, the SEC now mandates that brokers offering US equities to non-US residents (including Australians) must display Regulation SHO disclosures and provide regular compliance updates. This helps Aussie investors understand their rights and obligations.
• Market Maker Exemptions Reviewed: In response to concerns about potential abuse, the 2025 rules review exemptions that allowed market makers to short sell for liquidity purposes, narrowing the scope and increasing oversight.

These updates are designed to clamp down on manipulative practices, boost investor confidence, and ensure smooth settlement of trades — all of which have become more important as Australians flock to US stocks via platforms like Stake, SelfWealth, and IG.

Why Should Australian Investors Care?

Although Regulation SHO is a US regulation, it has practical consequences for Australians who:

• Trade US stocks directly through international brokerage accounts
• Invest in global ETFs or managed funds with US equity exposure
• Follow US market trends that influence ASX-listed shares

Here’s why keeping an eye on SHO matters:

1. Settlement Risks: If you’re short selling US shares, understanding Regulation SHO helps you avoid settlement failures and costly forced buy-ins by brokers.
2. Transparency and Protection: The new 2025 rules mean you’re more likely to receive clear, timely information about your trades, and less likely to be caught out by market manipulation or broker errors.
3. Market Volatility: Episodes like the 2021 meme stock surge have shown how short selling can amplify volatility. Regulation SHO’s updates aim to reduce systemic risk — good news for long-term investors everywhere.

Example: An Australian investor uses a local broker to short sell shares of a US-listed tech company. Thanks to the 2025 Regulation SHO updates, the broker must provide proof that the shares can be borrowed, deliver them on time, and inform the investor about any settlement issues. This reduces the risk of unexpected losses or regulatory headaches.

Comparing to Australian Rules: What’s Different?

Australia has its own short selling regulations under ASIC, but there are some key differences:

• Disclosure: The ASX requires public disclosure of short positions above a certain threshold. The US, under SHO, focuses more on settlement and borrowing requirements.
• Settlement Periods: Both Australia and the US now operate under T+2 settlement cycles, but the US rules mandate stricter close-out timelines and public reporting for failures.
• Cross-Border Compliance: Aussie brokers offering US market access must comply with both sets of rules — making an understanding of Regulation SHO essential for compliance teams and investors alike.

Conclusion: Staying Ahead in a Changing Landscape

Regulation SHO remains a cornerstone of US market integrity, and its 2025 updates reflect a global push for transparency and investor protection. For Australians trading US stocks, understanding these rules isn’t just about compliance — it’s about staying ahead in a fast-evolving market. Whether you’re a short seller, ETF investor, or just keen to understand what drives Wall Street, keeping Regulation SHO on your radar will help you make smarter, safer decisions.