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Confusion over intraday short selling
Mark T Bird
Publish date: Sat, 28 Apr 2018, 06:37 PM
Instrument is aimed at boosting liquidity in local stock market
EARLIER in the week, there was much confusion about intraday short selling (IDSS) further exacerbating the poor conditions in the stock market and hence creating more downward pressure on stocks.
The misconception was that with IDSS, short selling was now being practiced in full force in the Malaysian bourse. Thus, should a company announce negative developments or poor results, short sellers would take advantage of the situation by shorting the stock en masse. This would leave long-term value investors at a disadvantage.
This misconception is wrong on many fronts.
Firstly, regulated short selling (RSS) has been in Malaysia since 2007. It is nothing new, with the latest development being that intra-day short selling has now been implemented on April 16, in line with Bursa Malaysia’s vision of further developing the local capital market.
Secondly, short selling in Malaysia is regulated, meaning there is a cap to its maximum downside and trading volume per day.
All this sudden interest in short selling started because Bursa and the Securities Commission (SC) announced earlier this year their intention to implement the IDSS framework for all invstors in a bid to boost liquidity in the local market.
There are now some 280 securities approved for short selling. This list will be reviewed every six months.
Hence on April 16, Bursa finally implemented the IDSS framework. Naturally it was only a matter of time that a stock be traded under the IDSS framework. Now, that stock happened to be Unisem (M) Bhd . The timing was ripe. The tech sector had been battered and Unisem’s share price had already been heading south for the last four months.
So when Unisem announced poor first-quarter results on Wednesday, the stock was shorted, and by the afternoon trading session, Bursa had already suspended its proprietary day traders (PDT) and IDSS activities for the rest of the day.
Bursa said in a statement that this was because its last done price had dropped by more than 15 sen or 15% from the reference price. Unisem had fallen by 18%.
Now it is worth pointing out that the total trading volume for Unisem on Wednesday was 21.4 million shares. Of this, only 12,000 shares were traded for IDSS. This means that the bulk of the selling on Unisem was not on short selling – it was normal long investors selling down the stock due to its poor results.
Just to go back to basics, short selling is the sale of a security that is not owned by the seller or that the seller has borrowed. Short selling is motivated by the belief that a security’s price will decline, enabling it to be bought back at a lower price to make a profit.
The benefits of short selling
RSS has already been in Malaysia over the last decade. In Bursa’s latest measure, it is simply refining it further by allowing PDTs to do IDSS. This means that they are able to short sell within the day, and need to close out their positions on the same day.
RSS involves borrowing shares of a company and selling it with the hope it can be bought back at a later date at a lower value.
RSS was banned in Malaysia in September 1997 but reintroduced in 2007.
Investors in Malaysia can participate in RSS so long as they have a stock borrowing and lending agreement approved by the SC.
Currently, the Securities Borrowing and Lending (SBL) is a facility offered by Bursa to enable the borrowing and lending of securities. The two models of SBL currently being offered are Central Lending Agency and Negotiated Transaction.
As of Feb 5, 2018, there are some 280 stocks eligible for SBL, meaning that these stocks can be traded both for RSS and IDSS.
Statistically, most Malaysian investors are still long investors. This can been seen in the trading volume for short selling.
For example, let’s take a look at RSS trading volume on April 26. The RSS value was only RM21.67mil on volume of 6.5 million shares! Furthermore, these RSS trades were done only over 38 stocks. That means, averagely, only 171 shares were done per stock.
This is extremely low in comparison to the total value of shares traded for that day of RM2.31bil on volume of 2.05 billion shares.
Now, the typical investor psychology is to buy when they see prices rising and to “hasten the buying” as the price further ascends so as not to get left behind.
With the presence of short selling, short sellers tend to prevent rallies from going too high – as they provide a natural structure to sell shares when they become “overvalued”, even if the euphoric bulls are trying to bring the momentum up.
On a similar vein, during periods of downtrend, the fall in stocks aren’t too excessive as shorts have a motivation to cover.
In markets where short sellers are restricted, market movements are much more volatile – with reports indicating moves of 6% or 7% in the main index being very common. Individual stocks also fluctuate by more than that.
Thus, while not having short selling may help prices rise, it also helps prices fall harder and faster.
MIDF Amanah Investment director of corporate investment banking Sherilyn Foong says that RSS provides another avenue of income stream from trading opportunities for professional day traders and investors, as seen from the experience of the more developed and mature markets all over the world.
“It also provides depth, breadth, liquidity, velocity and sophistication to rapidly developing markets and bourses as they evolve and progress,” she says.
On its popularity on the local bourse, she says that admittedly, many market players are still adopting a wait-and-see attitude before embracing it wholeheartedly.
“Currently, it’s mainly the well versed professional day traders that are its regular players,” she says.
Rakuten Trade Sdn Bhd vice-president (research) Vincent Lau has mentioned that short selling plays an important role in capital markets for a variety of reasons, including more efficient price discovery, mitigating price bubbles, increasing market liquidity, facilitating hedging and other risk management activities.
If Malaysian investors are not allowed to short stocks, then they can only benefit when a stock goes up.
“Via shorting, a trader can benefit from a decrease in an instrument’s value, without owning it. Going short also allows traders to benefit even when markets are going down,” he said.
Bursa has said that market controls for IDSS include a suspension of short selling if a stock’s price falls by more than 15% from the previous day’s closing price, or if the gross short-selling volume exceeds the daily maximum limit of 3% of outstanding shares per security. On top of that, naked short selling – which means selling done without borrowed scripts – is not allowed.
“This shows that Bursa has robust safeguards in place and no naked short selling is allowed. RSS and IDSS will create more depth in our capital markets,” says Lau.
source StarBiz
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Discussions
1 person likes this. Showing 6 of 6 comments
Macam2 ada, short selling ler, GE ler, candidate X dapat tanding ler, penuh dengan confusion, baik minum kopi kedai mamak, tengok mamak uli & tebar roti canai lagi straight forward
2018-04-28 18:59
this new IDSS...have a feeling only made market less liquid at the moment.
must have been introduced for the benefit of Bursa Malaysia and remisier commissions...but it may not workout as planned.
2018-04-28 21:02
i still thinking short selling make bursa become worse...beside it is non syariah compliance actually (it illegal to sell something that we do not own).... amendment should be done....
2018-04-28 21:33
If u want to try short selling, u can do so in the futures mart but not KLSE. U may end up trapped as KLSE is not liquid enough. Funds like EPF have plenty of good stocks in their holdings to sell down. They do not have to borrow. They just sell all their way down n buy back when it reach new lows.
2018-04-29 17:00
Hi guys
Better leave short selling to the professionals
There are now 280 counters designated for short selling.
How to profit from it safely?
Answer:
JUST BUY STOCK BROKERING FIRM LIKE TA ENTERPRIZE
Every time you buy, sell or short sell & cover TA stands to get a fee.
So the Best Buy is TA
2018-04-29 17:40
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This book is the result of the author's many years of experience and observation throughout his 26 years in the stockbroking industry. It was written for general public to learn to invest based on facts and not on fantasies or hearsay....
忍者 NinjaGal
Ninja think selling something that you do not own is called fraud. You see, if ninja sell somebody a Mercedes that ninja do not own, Ninja will likely go to jail. Apparently if stock brokers sell stock they do not own, they get to go home in the Mercedes. What la!
2018-04-28 18:50