Measures in place to ensure orderly short-selling market: Bursa Malaysia

KUALA LUMPUR: Bursa Malaysia has assured investors that it has put in place sufficient measures to ensure any shortselling, which is deemed to have a speculative element that could shake market confidence, is done in an orderly manner.

According to Bursa Malaysia executive vice-president of market development of securities market Shahrul Amry Abd Malek, Bursa Malaysia has imposed robust compliance requirements for regulated short-selling (RSS) in safeguarding investors’ interests, such as the need for brokers to establish internal controls and processes, before carrying out the RSS business.

To ensure eligible securities have sufficient liquidity and are less susceptible to manipulation, he said, these securities must fulfil certain requirements, such as having a daily market capitalisation of RM500 million for at least three months; at least 50 million units in public float; and average monthly traded volume of at least one million units for 12 months.

Plus, as short-selling is deemed a high-risk investment tool, Shahrul Amry said, Bursa Malaysia has put in place the necessary surveillance system to ensure an orderly RSS market.

“We know who is borrowing and who is lending as well as the designated account. There is a tick rule and you can only short-sell stocks that are more liquid,” he told SunBiz in a recent interview.

Under the rules, an approved RSS security cannot be short-sold when the trading volume hits 10% of its total capital on an aggregate basis and 3% within a day.

Shahrul Amry pointed out that Bursa Malaysia’s RSS framework is in line with the International Organisation of Securities Commission’s principles for effective regulation of short-selling, which are control, reporting and transparency, compliance and enforcement framework.

RSS can only be keyed in at the best offer price and sellers are not able to hit the bid price. Shahrul Amry said this limits the ability of short-sellers to push down share prices as they must wait for the securities to be bought.

On claims that the local stock is not “broad and deep” enough to have more RSS activities, Shahrul Amry said it is a “chicken or egg” situation.

“If you look at the vibrant developed market, they have all these. It is not that they have it after becoming vibrant. It’s part of the ecosystem that you need to be vibrant,” he opined.

A total of 237 stocks can be shortsold, Bursa Malaysia data shows. The list is reviewed twice a year.

Shahrul Amry believes that the RSS framework could facilitate more trading activities and price discovery while enabling the implementation of hedging and arbitraging strategies by market participants.

“It gives efficient and better pricing for the businesses. When more people participate, then the market will become more efficient,” he said.

Shahrul Amry also touched on other investment instruments such as exchange-traded funds (ETFs), put warrants and convertible bonds, which need more market participation.

“If you don’t allow short-selling, then the market makers will hold a lot of the position, then it is very costly for them. But if they can just borrow and shortsell, then it will be less costly for them to do this business.

“If more people are willing to become market makers for ETFs, then you’ll have a better ETF market. Not just ETFs, it also includes put warrants, convertible bonds,” he added. – by Lee Weng Khuen