Market not ready for open short selling yet

PETALING JAYA: The time is yet to come for Malaysia to have a more liberalised short selling market given that Bursa Malaysia has not reached its maturity level, analysts say.
An analyst who declined to be named said the basic requirement to have short selling is that it is a deep and broad market to ensure that the market won’t be controlled by any investor.
However, based on this criteria, he opined that it is not the right time to have greater short selling transactions.
“If you look at the trading volume, even though there has been an increase in total transacted value on Bursa Malaysia, these are mainly concentrated on a few stocks.
“Some stocks are not even traded throughout the day, so the market may not be liquid enough. I don’t think we’re ready for an open type of short selling,” he told SunBiz.
The analyst cautioned that with low trading volume for the whole market, any short selling activity could lead to a significant uptrend or downtrend of a particular stock due to the leverage effect.
Until recently, trading was relatively thin on Bursa Malaysia with less than two billion shares traded daily.
Recent weeks have seen a spike though, on the back of active foreign fund participation as well as market bullishness ahead of the general election. A total volume of three billion to four billion shares were traded each day last week. This compares with three million to five million for restricted short selling.
Hong Leong Investment Bank (HLIB) Research head of research Sia Ket Ee however opined that the market needs more mechanisms for price discovery eventually, when the market reaches a certain level of maturity. It is also seen as the fastest way to establish the fundamental value.
“By allowing short selling, you will see the market taking two-way views, then it will expedite the price discovery as the market is a collection of views from various types of investors,” he said.
When contacted, a fund manager opined that short selling should not be encouraged from an ethical perspective.
“I’m not so supportive of this idea because it will build volatility of the market,” he said.
Nonetheless, he said if the regulator were to provide more flexibility to the short selling activity, retail investors should also be given the chance to participate with sufficient rules and regulations put in place to protect the investors’ interest.
“Even for institutional funds (like us), short selling is not allowed. Our licence only allows us to long shares. Usually the traders and private equity managers are allowed to short sell the shares,” he said.
Recall that the restricted short selling (RSS) and securities borrowing and lending (SBL) were first introduced in 1996, but suspended barely a year later, following a meltdown in stock prices during the 1997 Asian financial crisis.
The trading instrument was reintroduced in January 2007, with a list of 100 eligible stocks. As of now, there are a total of 237 stocks that can be short sold. Currently, retail investors are still not allowed to participate in any short selling activity.
In February, Bursa Malaysia announced the revision of tick rule on short selling, which allows orders to be executed at the best current asking price or higher, instead of a price higher than the last done price.
In addition, investors are now allowed to borrow securities for the settlement of potential failed trades rather than be subjected to the buying-in process. With this facility, investors can now mitigate the costs of genuine trade errors in the market.
According to its CEO Datuk Seri Tajuddin Atan, there had been clear indication of market interest in Bursa’s RSS and SBL, with the total SBL size standing at RM4.9 billion at the end of January.
Last week, Bank Negara assistant governor Adnan Zaylani Mohamad Zahid was also quoted as saying that the central bank is considering easing rules on the short selling of government bonds, by allowing companies and insurers to short sell sovereign bonds to help them manage the interest rate exposure and generate more trading volume.
On this, the analyst said the short selling of government bonds could prevent overbought and overvalued conditions.
“When you allow the short selling mechanism, then it will have a check-and-balance on the existing price bubbles,” he said.