Rule Atlas
SEC Rule 201: Regulation SHO: Circuit Breaker Rule 201 Application and Exceptions
Under SEC Rule 201 (FINRA / SEC Reg NMS & Reg SHO), regulation SHO: Circuit Breaker Rule 201 Application and Exceptions establishes the authoritative rules tested on the FINRA Series 57. This lesson details SEC Rule 201, the alternative uptick rule, covering its activation, short sale price restrictions, and specific exceptions for various order types and transactions. VoraPrep verifies every threshold, worked table, and practice question below against the current FINRA Series 57 blueprint.
Core Statutory Concepts
| Feature | Rule 201 (Alternative Uptick Rule) | Original Uptick Rule (Rescinded) |
|---|---|---|
| Trigger | 10% price decline from previous close | No specific trigger; always active |
| Duration | Remainder of day + next full trading day | Always active |
| Price Test | Short sale price > NBB OR = NBB if NBB > prior NBB | Short sale price > last trade price |
| Scope | All NMS stocks | Exchange-listed stocks |
| Purpose | Prevent exacerbating downward spirals | Prevent short selling into declines |
A market maker is shorting shares of 'JKL' stock in connection with bona fide market-making activities to facilitate customer orders and maintain liquidity. Which of the following statements most accurately analyzes this situation?
Practitioner Application: Regulation SHO: Circuit Breaker Rule 201 Application and Exceptions
A proprietary trading firm's algorithmic system detects a significant price decline in XYZ stock, triggering a 10% drop from the previous day's closing price. The firm's short-selling algorithm is designed to capitalize on downward momentum. However, a junior trader questions whether new short sale orders can be executed at the current bid price, or if they must adhere to a higher price, given the market conditions. The firm needs to ensure its system is compliant with Regulation SHO Rule 201 to avoid violations and potential penalties, especially concerning the timing and pricing of short sales during periods of significant market volatility.
- SEC Rule 201, also known as the alternative uptick rule or circuit breaker rule, is designed to prevent short selling from exacerbating a downward spiral in a stock's price. It restricts short selling when a stock's price has fallen significantly. The rule applies to all NMS stocks.
- Activation Conditions and Duration: Rule 201 is triggered when an NMS stock's price declines by 10% or more from its previous day's closing price. Once triggered, the rule remains in effect for the remainder of the trading day and the entire next trading day. This means that if a stock hits the circuit breaker on Tuesday, short sale restrictions apply from that point until the close of trading on Wednesday.
Common FINRA Series 57 Distractors on SEC Rule 201
- 1⚠️ Exam trap: Misinterpreting the 10% threshold. The 10% decline is measured from the previous day's closing price, not the opening price or any intraday high.
- 2⚠️ Exam trap: Forgetting the duration of the restriction. Rule 201 applies for the remainder of the day it's triggered and the entire next trading day. An exam question might test your knowledge of whether the restriction is still active on the following day.
- 3⚠️ Exam trap: Overlooking the specific exceptions. While the general rule is strict, certain transactions are exempt. Failing to recognize these exceptions can lead to incorrect answers on the exam.
- 4Rule 201 Trigger: Activated when an NMS stock's price drops by 10% or more from its previous day's closing price.
- 5Duration: Remains in effect for the remainder of the trading day it's triggered and the entire next trading day.
Frequently Asked Questions: SEC Rule 201
What is the core rule under SEC Rule 201 (Regulation SHO: Circuit Breaker Rule 201 Application and Exceptions)?
Under SEC Rule 201 (FINRA / SEC Reg NMS & Reg SHO), regulation SHO: Circuit Breaker Rule 201 Application and Exceptions establishes the authoritative rules tested on the FINRA Series 57. This lesson details SEC Rule 201, the alternative uptick rule, covering its activation, short sale price restrictions, and specific exceptions for various order types and transactions. VoraPrep verifies every threshold, worked table, and practice question below against the current FINRA Series 57 blueprint.
How is SEC Rule 201 tested on the FINRA Series 57?
⚠️ Exam trap: Misinterpreting the 10% threshold. The 10% decline is measured from the previous day's closing price, not the opening price or any intraday high. ⚠️ Exam trap: Forgetting the duration of the restriction. Rule 201 applies for the remainder of the day it's triggered and the entire next trading day. An exam question might test your knowledge of whether the restriction is still active on the following day.
Where can I practice FINRA Series 57 questions on Regulation SHO: Circuit Breaker Rule 201 Application and Exceptions?
Test yourself instantly with the free playable FINRA Series 57 question on this page, or launch VoraPrep's full FINRA Series 57 adaptive question bank, interactive lessons, and 1:1 exam simulator at voraprep.com/series57.