Locate (Short Selling)
A locate is a broker-dealer confirmation that a sufficient quantity of a specific security is available to borrow before executing a short sale, as required by SEC Regulation SHO to prevent the creation of naked short positions in most circumstances.
Before accepting a short sale order from a customer, a broker-dealer is required under Regulation SHO (specifically Rule 203) to have reasonable grounds to believe that the security can be borrowed and delivered by the settlement date. The process of identifying and reserving a source of borrowable shares is referred to as obtaining a locate. Once a locate is confirmed, the broker has documented the availability of shares and may proceed with the short sale order.
Locates are obtained by broker-dealers from a variety of sources: their own inventory of securities held in customer margin accounts (with customer consent through margin account agreements), from other broker-dealers in the street borrow market, or from securities lending desks at custodian banks and prime brokers. The locate process is largely automated at major firms for easy-to-borrow securities; for hard-to-borrow securities, manual coordination may be required.
The distinction between easy-to-borrow (ETB) and hard-to-borrow (HTB) is critical. ETB stocks are those for which locates are routinely available from the broker's supply without specific pre-trade arrangements — many large-cap, highly liquid stocks fall into this category. HTB stocks require specific pre-trade confirmation that shares are available. Brokers maintain daily HTB lists that update as borrow availability changes, and customers executing short sales in HTB names must actively confirm availability before placing orders.
Regulation SHO also establishes the close-out requirement: if a short sale results in a failure to deliver at settlement, the broker-dealer has a defined period to close out the fail by purchasing or borrowing the shares. Persistent failures in a security can result in the stock being placed on the Reg SHO threshold securities list, published daily by exchanges, which signals ongoing settlement problems and triggers enhanced close-out requirements. Understanding locates is essential for anyone engaging in short selling in U.S. equity markets.