When you short a stock, you are borrowing shares from a lender. In some situations, those shares may no longer be available to borrow.
A share recall occurs when the lender requests that the borrowed shares be returned. This can happen for a variety of reasons, including changes in share availability, corporate actions, or increased demand for the shares.
If a recall occurs and replacement shares cannot be borrowed, your broker may be required to close your short position by purchasing shares in the market. This is known as a forced buy-in.
Regulation SHO is an SEC rule that governs short selling and settlement in U.S. markets. Among other requirements, Regulation SHO is designed to reduce settlement failures by requiring brokers to close out certain short positions if shares cannot be delivered within required timeframes.
If a short position is subject to a Regulation SHO close-out requirement and shares are not available to borrow, your position may be closed through a forced buy-in. Forced buy-ins can occur without advance notice and at prevailing market prices.
How can this affect your account?
Forced buy-ins and recalls are unique risks of short selling. Even if you still believe a stock’s price will decline, you may be required to close your position due to share availability or regulatory requirements.
Because stock prices can rise quickly—particularly in heavily shorted or hard-to-borrow stocks—a forced buy-in may result in losses, including losses that exceed your initial investment. Borrow availability and regulatory conditions can change at any time and are outside of an investor’s control.