Locate requirement

The locate requirement is an SEC rule requiring a broker to have a reasonable basis to believe shares can be borrowed before allowing a client to sell a stock short. Before executing a short sale, the broker has to confirm the shares are available somewhere, either on its own inventory list of shares that are easy to borrow, or by directly arranging to borrow them from another lender, so that the trade can be settled on time rather than simply being promised on paper.

This requirement exists specifically to prevent naked short selling, where a trader sells shares short without ever borrowing them, leaving a real risk that the shares cannot be delivered when the trade needs to settle. By forcing the locate to happen before the sale, rather than after, the rule aims to keep short selling tied to a real, identifiable supply of borrowable shares rather than an unlimited or fictional one.

In practice, brokers maintain lists of stocks that are easy to borrow, letting most short sale orders in liquid names go through instantly because the broker already has a standing arrangement covering that supply. For a stock that is hard to borrow, the broker has to perform an individual locate for that specific order, which can take longer or fail entirely if no shares are available, in which case the short sale simply cannot go through no matter how much the client is willing to pay in borrow fees.