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.


Moola said...

Good issues pointed out.

I am also for RSS but I would like to add just one comment...

Rational thinking is still a must.


Rohan_888 said...

I am very much against short selling. The reason is that rules are excellent, but there is no enforcement, and that is absolutely necessary for allowing short selling.

As an example, I could easily give 100 cases where announcements were preceded by a sharp rise or fall in the shareprice, but was ever anyone conficted of insider trading?

If an insider has important information he/she currently can only buy the share if the news is favourable. If short selling is allowed he/she can sell if the news is bad.

Regarding horseraces: the correct comparison is with betting horses to win versus betting horses not to win ("laying"). This last subject is very controversial and is one reason lots of governments have against betting markets like Betfair (in which you both can "bet" and "lay"). If an insider knows that a horse has no chance (because of connections), he/she can "lay" the horse. The opposite (knowing the horse is in better shape than expected, and to bet it to win) is much more difficult, you also require the "help" of all other contestants in the race, lots of random things can happen in a race.

BM wants everybody to think they are doing something usefull, when the only thing they should do (enforce the rules) they don't do.

Salvatore_Dali said...


I totally appreciate your concerns and good points made. I guess your main gripe is the lack of enforcement, and that short selling would benefit the insiders even more.

Agreed, but that should not be reason for not instituting short selling. What we have is a seperate problem - more market vigilance and enforcement. Of course insiders can still use proxies to act for them. Yes, it will be difficult to enforce and catch. We also have the same situation NOW with insiders always getting the jump on the rest on favourable news, do we want to eliminate that also by disbanding the stock market altogether. We live with what we have and try and voice out for improvements. At least with short selling, we ALL can monitor sharp increases in open interest thus alerting everyone to jumps in scrip lending and shorting. Going long by insiders is easier to mask.

I totally agree with you, more enforcement is needed, things like reporting as information is available not when it is convenient, the timing of information (cannot be a gap), enforcement on immediate families trading pattern, etc... we just need to adopt best practices from world standards.


Moola said...

Hi Rohan,

I regard short-selling as another form of how one trades the market(ie either long or short). And yes insider trading is very suspect here but this one issue had been existing forever in all markets everywhere. When there is money to be made, there will always be a crook somewhere and as you know when there is one crook, you will always find more and more. And as the famous saying goes, there is never ever just ONE cockroach.

So would I be against short-selling just because them 'cockroahes' will cheat?

My answer is NO. Either way, long or short, them 'cockroaches' will STILL cheat!

Having said all that, I really AGREE so much with that the enforcement of regulations had been so lacking.


Me? What I find it utmost disgusting is how OUT local press is usually USED AS A TOOL by these 'cockroaches' whenever they want to cheat!

WHy is why, I have been constantly blogging on this issue.. yeah... it probably be a vain effort (yeah.. some would say tok is cheap) but I hope sooner or later I will be heard... :)


Moola said...

Hi All,

Here is some intersting stuff...

60 Minutes will be doing a segment this Sunday covering controversial hedge fund SAC, and Gradient, and their little disagreement over stock manipulation charges. Specifically will discuss the short and distort accusations wherein Cohen of SAC is accused of using a hatchet job approach to driving stock prices into the toilet, for profit.

Moola said...

Guess what?

They did not air this program! Instead they showed Tiger Woods!!!


Amazing isn't it?

anyway... here is the link to the transcript of the program.

Moola said...

part 3 of that article ...


60 Minutes has learned that on top of Biovail’s civil suit, the Securities and Exchange Commission is investigating the case, looking into possible stock manipulation and conflict of interest. But proving outright securities fraud in this case won't be easy. Remember, hedge funds are barely regulated and operate under a veil of secrecy.

And, according to Richard Blumenthal, the Attorney General of Connecticut – home of SAC - the issue of what’s actually illegal here is not so clear.

"There is no prohibition against anyone calling an analyst and providing information and that kind of free flow of information often can do the market good," says Blumenthal.

"I’m curious to know whether it matters that the information was true or false for law enforcement?" Stahl asked the attorney general.

"It matters a lot whether the information was true or false," Blumenthal said.

"So sharing in and of itself is okay, but if they’re feeding false information—" Stahl said.

"With the knowledge it’s false—" Blumenthal said.

"With the knowledge that it’s false—"Stahl replied.

"For the purpose of driving down the stock and with a position in the stock," Blumenthal said.

"All of that together is a crime?" Stahl asked.

"Within— well, it may not— it depends on who knows what, what the criminal intent may be, if it’s there," Blumenthal answered.

"This is not going to be easy to prove is what you’re saying," Stahl said.

"None of these securities violations is a slam dunk, ever, under the best of circumstances," he replied.

Moola said...

Found the link to the video...

look for 'Betting On a Fall'

Click on 'Watch: Lesley Stahl's Notebook'...


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