Business Times - 23 Sep 2008

SGX deters naked shorts with disclosure measures

Dealers laud move, saying it will provide more clarity to the investing
public

By LYNETTE KHOO

(SINGAPORE) To improve transparency and deter abusive naked
short-selling,
the Singapore Exchange (SGX) will start disclosing information on naked
shorts with immediate effect.

From today, SGX will publish the list of buying-in securities and the
volume of shares sought at 11am daily. The information will be
published on
SGXNET and on the SGX website.

SGX will publish the list of securities it bought-in, and the volume
and
dollar value, at 8.30am the following business day.

These measures are meant to ‘enhance existing transparency in the
market
and deter failed deliveries’, SGX said in a statement.

The Central Depository currently has a buying-in process that ensures
short
positions are covered by the end of the third trading day from the
short-sale date, at a price at least two bids higher than the last-
traded
price. Buying-in takes place from 11.30am every day.

SGX warned market participants against short-selling in the buying-in
market or simply put - cumulative short-selling that has the effect of
forcing down prices further before SGX buys-in.

‘Cumulative short-selling of individual share securities without the
discipline of borrowing to cover delivery obligations may threaten the
orderliness of our market, with implications for the integrity of the
clearing system,’ it said.

There will be a penalty of 5 per cent of the value of the failed trade
subject to a minimum of $1,000, on top of the current processing fee of
$30
per contract for buying-in.

From Sept 25, SGX will punish any failure to deliver shares in the
buying-in market with a $50,000 fine and/or disbarment from
participating
in the buying-in market.

SGX said it will review these measures after a month, and fees will be
reviewed from time to time.

The latest move by the exchange comes on the heels of short-selling
curbs
imposed by regulators in Taiwan, Australia, Ireland and Europe
following a
ban by the US Securities and Exchange Commission last week. Such bans
have
since drawn criticism that many hedge funds could be squeezed out of
business.

But a draconian curb on short-selling is unlikely, as SGX assured
yesterday
that trading of stocks has been orderly and settlement has been timely
despite current market turbulence and global financial uncertainty.

Dealers yesterday lauded the move by SGX, saying it will provide more
clarity to the investing public and deter abusive short-selling from
bringing down companies.

‘If you ask me ‘Should it have been earlier?’ my answer is definitely
yes,’
said DMG & Partners Securities senior dealing director Gabriel Yap.

‘The situation we have seen in the US in the past week shows very
clearly
that naked shorts with the intention of bringing down a company are a
very
serious thing. The least we can do is to publicise or have greater and
more
in-depth information pertaining to naked shorts.’

A dealer with a local brokerage said he believes the new measures are
aimed
at increasing market awareness, akin to those already in effect on the
Australian and Hong Kong stock exchanges.

The Australian Stock Exchange discloses both naked and covered
short-selling positions, while the Hong Kong bourse collates data on
borrowed scrip and releases a summary report twice a day.

‘This will give investors some sense of direction on where the market
is
heading,’ the dealer said.

So, what does the banning of short-selling mean to the market?

It’s a good question. In our view, short-selling is no more to “blame” for markets falling than long buying is to blame for markets rising. In other words, it does have an impact on the downside but only as far as it adds to the number of sellers. It is not the sole reason for a share price falling.

We keep hearing commentators and analysts tell us that the likes of ABC Learning and Babcock & Brown are fundamentally strong companies. We are told that they hold great assets and that the market is failing to recognize it.

a couple of months ago that it was a misleading argument. Sure, these companies may have good assets, but that is only one side of the balance sheet. Don’t forget about the debt on the other side. If we only concerned ourselves with the assets then share prices would never go down.

Cause and Effect
It is easy to confuse cause and effect. Short sellers aren’t the cause of a share price falling. The cause is due to something that the company has or hasn’t done. The effect of the company doing (or not doing something) leads to investors selling those shares. In some cases this will involve investors short selling.

In reality, the ban on short-selling is likely to have almost zero impact. There may be short term price action to the upside as those who currently have short positions buy back the stock to close out. Secondly, those investors that use short selling to hedge a long position may choose to close out their long positions, which could put pressure to the downside.

But for those professional investors wanting to trade ’short’ they need look no further than the Options market. Options traders will be able to implement reasonably simple strategies that will give them almost exactly the same exposure as if they had used the share market to short sell.

In financial terms they call it a “synthetic short.” By simply buying an ‘at the money’ Put Option and writing an ‘at the money’ Call Option the trader can replicate a short trade. It is not exactly the same, but if an investor really wants to short particular stocks it is an easy way to do it.

The bigger question is what will happen to the markets next. We all have an interest in share prices rising, but are we really interested market manipulation?

ASIC and the ASX have rules against investors falsely manipulating the market. Yet its actions to restrict short-selling are doing exactly this in the short term. The banking stocks again look likely to be the main beneficiaries of this policy when they eventually start trading this morning.

What Happens When the Party is Over
The party on the stock market will doubtless continue today after Friday’s celebrations. But as is usually the case with a big party, there are plenty of hangovers.

Governments and regulators have thrown everything at the markets over the past week to try and ‘fix’ things. It may work. But if it doesn’t they haven’t left themselves with many other options.