The Securities Commission Malaysia (SC) and Bursa Malaysia will have to make a decision on whether to lift or extend the suspension on short-selling activities. Recall that the temporary suspension, which began on March 24, was initially set to end on April 30, but was extended to June 30.

When contacted, Bursa Malaysia says the stock exchange and the SC are “closely monitoring developments that are taking place in this space locally as well as regionally”, as they continuously assess control measures to manage possible excessive volatility.

While various factors should be taken into consideration, the regulators’ decision to extend or end the suspension could send an important signal to market participants.

Although short-sellers are arguably not the first to trigger a selloff, they could amplify a selldown when unwinding their positions in large volumes. If they are allowed back,  can the stock market absorb the selling pressure? If selling pressure is too strong, will it kill the rally?

Some might argue that the stock market remains fragile, although market sentiment has improved. As it is, the FBM KLCI has regained almost all the ground lost since the sharp drop in mid-March.

This disconnect between the stock market and underlying economic fundamentals, as well as corporate earnings, however, has left many serious investors perplexed. If short-selling is not allowed, will the disparity between the real economy and the financial markets get worse?

The regulators’ decision on whether to extend or lift the suspension of short-selling activities may be taken as their view on whether the stock market is overheated. It is almost like central bank decisions on interest rates —  you want to tame inflation but  do not want to kill economic growth.  In this case, the regulators will have to pull off a fine balancing act.