SHORT selling (SS) has become a much dreaded phrase among the retail investor fraternity in the local bourse.
Prior to its suspension on March 24 last year when global markets were hammered by the equity rout, tendency to pin the blame on intraday short selling (IDSS) was rife whenever a highly speculative stock suddenly saw its price plunging.
With the ban on IDSS and IDSS by proprietary day traders (PDT Short Sale) due to be lifted on Feb 28, it makes valid sense to share the intricacies of SS with the retail investor fraternity who tends to only see the negative side of short selling.
This is despite, in principle, SS enables better price discovery as over-priced stocks may be shorted so that they may trade at the right prices. Most – if not all – mature stock markets have some elements of short selling.
Nevertheless, SS is a two-edged sword in that it can also wreak havoc especially during turbulent market conditions.
That explains why all types of short selling activities are regulated in Malaysia, notably there are percentage (of share capital) limits imposed and that not all stocks are available for short selling – only those with high liquidity.
David vs Goliath syndrome
“Minority shareholders must bear in mind that before the recent market turbulence caused by the pandemic, they lived rather peacefully in co-existence with regulated short selling,” Minority Shareholders Watch Group CEO Devanesan Evanson told FocusM.
“There should be no untoward fear that the reintroduction of short selling will necessarily be to the detriment of minority shareholders.”
What minority shareholders should be scrupulously aware of is the risk of some unscrupulous shareholders portraying the short sellers as the bogeyman who must be countered thereby creating a David vs Goliath syndrome.
“Emotions (primarily anger) are whipped up to buy shares at higher and higher prices to cause a ‘short squeeze’ on the short sellers,” observed Evanson.
“This is where there may be a sub-plot in that those shareholders who are asking the minority shareholders to buy at the higher prices may actually be unloading their own shareholdings at the higher share prices – a treacherous double-cross of sorts.”
He added: “In all likelihood, this new game in town will fizzle out and meet a natural end as the Malaysian short selling ecosystem is highly regulated.”
Don’t replicate GameStop rally
Malaysian Investors Association (MIA) vice-president Aaron Ting supports the lifting of IDSS which signifies confidence in Bursa Malaysia while giving investors more trading options in the market.
“Short selling can increase the vibrancy and quality of the markets through the lower bid-offer spread, improved market depth and liquidity, and increased volume albeit at increased volatility,” Ting told FocusM.
He lamented how the recent GameStop-inspired short squeeze has led to a copycat group called “bursabets” which sought to mislead traders into `short squeezing` stocks of Top Glove Corp Bhd.
“This led to some traders with incomplete knowledge deciding to follow suit,” he commented.
“This eventually triggered unhealthy speculation and more seriously, the potential for market manipulation as the instigators may have a prior position in the stock and can profit at the expense of others.”
He added: “The GameStop short squeeze where 140% of the company’s shares were sold short cannot be replicated here because Bursa has the required safeguards in place for short selling to prevent destabilisation of markets.” – Feb 4, 2021