‘Shorting’ of shares in SA
USA: GAMESTOP SHARE PRICE PLUMMETS
In general, there’s limited retail investor activity in the local market.
As the dust settles and the GameStop share price plummets back towards earth it becomes evident there’s little chance of similar drama playing out in the South African market now or any time soon.
Not that there isn’t a large number of potential retail investors who wouldn’t like to “stick it” to powerful institutional investors. But the fact is that although South Africa is ahead of many emerging markets when it comes to short-selling, the local market is not active or robust enough to support the type of frenzied trading that saw GameStop’s share price rocket from around $40 (about R600) to just below $400 in less than a week.
And, crucially, there is almost no disclosure relating to the current limited level of short selling activity in South Africa. Frustratingly, judging by the response from the JSE and the Financial Sector Conduct Authority (FSCA), there is little hope of any improvement on this score in the short to medium term.
A related factor is that in general there’s limited retail investor activity in the local market.
Jean Pierre Verster, CEO of Protea Capital Management and one of the bestknown, and most effective, short sellers in the local market, reckons that at any time probably little more than 3-4% of the local market is short. Even if this is concentrated on 20 or so favourite stocks, it means there is way too little activity to support the sort of dealing patterns that underpinned GameStop’s rise to global fame at the end of January.
“The hedge fund industry is South Africa is worth around R65 billion out of a total market of over R2 trillion, about 50% of that R65 billion would be short at any time,” explains Verster.
Hedging by shorting
He says investment banks providing loans to corporate executives secured by their shares would also account for a large chunk of short activity. The banks would hedge their loans by shorting the share. But even if this is added in, the level of short trading remains a small percentage of the total.
An additional factor inhibiting any kind of aggressive action similar to the GameStop drama is the lack of information around short positions on the JSE.
In the US, the army of retail investors involved in trading in GameStop shares benefitted from knowing how many of the company’s shares had been shorted.
In general if this is a large percentage then it makes the sort of squeeze created by the buying activity of the retail investors much more effective. But if you have little idea of what the extent of the short position is, a GameStop-type play would be high-risk.
It’s difficult to know whether the non-existent level of disclosure on the JSE contributes to the limited shorting activity on the market or whether the poor level of disclosure is caused by the limited shorting activity. But the reality is there seems no rush to improve on disclosure with neither the JSE nor the FSCA planning to implement any sort of action.