Thursday, March 23, 2006
Short Selling In KLSE
Wise, Farsighted Or A Mistake
The government introduced several measures to enhance the local bourse including allowing large Malaysian companies with foreign operations and foreign owned companies with foreign assets of at least RM1 billion in market capitalisation to seek listing on Bursa Malaysia, enabling dual listings and reintroducing short selling. The government said the measures were aimed at bolstering the stock market to be a world class capital market. Other than that, to realign the regulatory framework, the securities and futures laws are to be reconsolidated into a single omnibus legislation.The consolidation of these two laws would enable the introduction of a single licensing framework for market participants.
Besides that, regulated short selling (RSS) and securities borrowing and lending (SBL) will be reintroduced, the government said. To attract global talent, the processing of visas and work permits for foreign individuals in all aspects of the financial services sector would be centralised at the respective regulators, namely, Bank Negara Malaysia and the Securities Commission.
RSS is a big decision and will be applauded and criticised by many. The naysayers will be highlighting that the market may not be deep enough. Participants may not be sophisticated enough. When authorities are claiming that GLCs are cheap, why would they go and derail that - as when shorting, most foreign institutions will be aiming for GLCs anyway. The timing is bad as we are trying to entice more buying not selling activity. Will result in more manipulation.
I am very much for RSS. My reasons:
1) Better valuation - You cannot keep a market artificial. By having RSS, you have a market that rewards and punishes good fundamentals and bad valuation. Valuation will be clearer and more transparent.
2) More activity - Right now, you can only participate in the market provided you have ONE view, you must be bullish. In general, markets will only have two to three mini bullish phases a year. In total, you would be happy to get 3 months of bullish activity - you can kiss goodbye the other 9 months. Remisers and dealers would now be more open to having two views instead of just one.
3) Restrict over-manipulation - Syndicates will have to do more legwork when ramping stocks. Last couple of weeks could have been a great opportunity to short sell the poultry stocks, or even some questionable highly traded Mesdaq stocks.
4) Investors can hedge and have more strategies - Now even the individual investor can act like a hedge fund. Say, I like property stocks ahead of the 9MP, but think that the activity is overdone in poultry. Go long on one side and borrow to short the other. This gives more choices and strategies, and can reduce risk. Of course if you are an idiot and go the other way, you would double your losses - but there are more choices now... or is it more ways to hang yourself?! But if you are a poor investor, you will eventually lose all your money anyway with or without RSS - RSS will be good for the good investor.
5) Investors' intelligence - This will propel the public to learn more and study more about stocks in general. You have to form real opinions and not just rely on hearsay. As it is more exciting, investors will indulge more. Just as in horse racing, if you only have WIN bets, its dull. But if you have QUINELLAS (forecasting the first 2 horses) or TRIFECTAS (forecasting the first 3 horse in the same order), you get more activity. The cynics who say that RSS is just for institutions because the man on the street would not be savvy enough is wrong. Yes, they may have to learn, but they will. If we stop introducing new things to the market for fear of ignorance - then nothing new will be added, its a myopic view. Then, warrants or futures would never be introduced in the first place. We just have to make sure there is sufficient information out there - know what free float is, what open shorts' balance (open interest) is, know what is squeezing the shorts, understand that you need to incur interest and related cost to borrow stocks to short, know what breakeven is in a trade, etc...
6) GLCs - It will put the GLCs on the backfoot. As Khazanah is still in the initial stages of reviving the GLCs, having RSS will delay any plans Khazanah might have to sell down their stakes. Only until GLCs are performing well will Khazanah have the luxury option to sell down some stakes. Increasing the free float at a time when a company is still struggling is an invitation to shoot oneself in the foot. (As argued before in my previous blogs, I am a big believer in Khazanah selling down their stakes to improve liquidity).
7) Bad timing? - Well, there can never be an excellent time, can it? Just do it already. Just make sure the lending procedures and interest charges are competitive and attractive for both side. For stock owners, they could make some money by depositing shares to lend.
8) Hedge funds - If all parties work well, we could see more hedge funds being very active in the KLSE. In fact, this move will put a lot of pressure on the neighbouring bourses to do likewise.
For those who think that share prices should be encouraged to go up, not down - that is a naive and shallow opinion. Stocks do not just serve to make you money. You participate in the growth potential of each stock. Stock markets DO NOT OWE US A LIVING. When you get it wrong, you get it wrong. Already without RSS, investors still lose so much money, why not give this a chance. Prices go up and down, now at least you can profit when you bet it on the way down correctly.
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