When regulation-sho's alternative uptick rule is active, short sales must be priced above the national best bid. Certain orders — for example some market-maker hedging and odd situations like the sale of a long position in transit — may be marked short exempt.
Mismarking is a real compliance failure, not a technicality, and brokers police it because the audit trail is inspected.
Example: a stock falls 10% from the prior close, triggering the circuit breaker for the rest of the day and the next. A normal short sell must rest above the bid; an exempt order may trade at or below it. Retail traders rarely qualify, and should expect their broker to reject the flag.