Does the market need short-selling?

Ensuring order: The temporary suspension on RSS activities was lifted from Jan 1, with the enhanced control measures to ensure stability and maintain investor confidence.

THE first trading week of 2021 has been a volatile one for Bursa Malaysia.

Across the stock market, decliners have been thrashing advancers each day of the first trading week.

The FBM KLCI slipped below the 1,600-point level by mid-week, although it recouped losses thanks to the 30.24-point push yesterday.

Apart from the ongoing political concerns, the key reason for the volatile week was regulated short selling (RSS) activities, which returned after the temporary suspension was lifted from Jan 1.

On Jan 4, which was the year’s first trading day, nearly RM1bil worth of shares were short sold and over 94% of the short-selling in the day alone happened among the Big Four glove stocks.

The short-selling pressure began to ease in the next two days, but again picked up pace on Thursday with a total short-selling value of RM275.32mil.

Fortress Capital Asset Management CEO Thomas Yong agrees with the regulators’ move to allow RSS activities again.Fortress Capital Asset Management CEO Thomas Yong agrees with the regulators’ move to allow RSS activities again.

Short selling occurs when an investor sells a security or financial instrument that was borrowed from the broker, with the plan to buy it back later at a cheaper price. Short sellers make a profit from the drop in a security’s price.

However, in the event of wide fluctuations in share prices or increased panic in the market, short selling could aggravate the decline in share prices.

With market conditions remaining uncertain as Covid-19 cases breached the 3,000-mark and a snap general election appears to be possible, one wonders whether the RSS suspension should have been extended further.

Speaking with StarBizWeek, Inter-Pacific Securities Sdn Bhd head of research Victor Wan says he expects short-selling pressure to stabilise once there is a greater clarity in market confidence.

A controlled coronavirus crisis, improved corporate earnings and a stronger economic recovery would ease the short-selling activities, according to him.

“If there is an increase in domestic and global Covid-19 cases, that would raise uncertainties and definitely affect short-selling pressure, ” he says. Wan also cautions that the local bourse is not out of the woods, with regard to short-selling.

“The current pressure is only coming from RSS. The intraday short-selling (IDSS) has yet to come in, so there is more risk there, ” he adds.

Bursa Malaysia and the Securities Commission lifted the temporary suspension on RSS activities from Jan 1, with the enhanced control measures to ensure stability and maintain investor confidence.

The daily gross short position limit for approved securities will be temporarily reduced from 3% to 2%, and a new cap of 4% on RSS aggregated net short position will be introduced.

However, the temporary suspension on the IDSS and intraday short selling by proprietary day traders (PDT short sale) which had been due to expire on Dec 31,2020, will be extended to Feb 28 this year.

The capital market regulators first introduced the temporary suspension of short-selling activities on March 24 last year, barely one week after the FBM KLCI slumped by over 200 points in the March 11-19 period.

Fortress Capital Asset Management CEO Thomas Yong agrees with the regulators’ move to allow RSS activities again.

He explains that the typical rationale for permitting RSS activities is premised on the objective of achieving market efficiency, where information flows are reflected into share prices in the quickest way possible.

While he acknowledges that short selling may be suspended during times of widespread panic, Yong says that such a move should be rare and infrequent.

This is because policy certainty is necessary for market participants to operate within known parameters.

“Outlook uncertainty alone is normal and typically insufficient as a basis for suspension.

“The Malaysian regulators’ stance so far is therefore well-justified, ” according to Yong.

Concurring with Yong, Hong Leong Investment Bank head of retail research Ng Jun Sheng says RSS and all other market-control mechanisms should be allowed to continue.By doing so, he expects the market recovery to be more sustainable through promoting a free market that reflects more accurate supply-demand price discovery.

“Overall, Bursa Malaysia and the SC have a duty and responsibility to ensure a true and fair and regulated market to ensure market participants cannot abuse and manipulate the counters, ” he says.

When asked whether there are possibilities for the regulators to re-impose a total short-selling ban, Ng believes it would be highly unlikely unless another “black swan” event or disaster emerges at a scale similar to Covid-19.“The short selling ban was first imposed on March 23,2020 as part of the regulators’ proactive measures to mitigate potential risks arising from heightened volatility and global uncertainties triggered by the unprecedented Covid-19 pandemic.

“However, the market has now significantly rebounded from Covid-19 lows to hover near pre-pandemic levels in the wake of massive government and central bankers interventions by introducing fiscal and monetary measures coupled with the multiple Covid-19 vaccine breakthroughs, ” he says.Ng points out further that short-selling is necessary in order to make the stock market more vibrant and to increase market liquidity.Bringing back short-selling activities would also help to make the local bourse more appealing to foreign investors, he adds.

While it is unknown whether the IDSS suspension will be extended beyond Feb 28, Ng expects the intraday activities to initially trigger “choppiness in the market amid knee-jerk selling”.

“But, this will offer a good opportunity for long-term investors to buy on weakness. Sectors that are vulnerable are highly liquid technology, banks, gloves, technology and tourism recovery stocks, ” he says.

Meanwhile, Fortress Capital’s Yong points out that stocks susceptible to short selling are typically those where valuations are unjustifiably rich and where securities borrowing is available.

“Smaller non-institutional stocks would normally only be more affected if naked intraday short selling is permitted again, ” he adds.

The temporary ban on short-selling, which was introduced in March last year, was not the first in Malaysia.

It was previously banned by former prime minister Tun Dr Mahathir Mohamad, following the 1997 Asian financial crisis to curb capital outflow.

In 2006, the ban was partially lifted, allowing the IDSS only for licensed proprietary traders on Bursa Malaysia.

In April 2018, short-selling of stocks was reintroduced on Bursa Malaysia for all investors.

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