The Covid-19 outbreak has exacerbated the slowdown in the global economy, which in turn has caused turmoil in stock markets worldwide The broker said that suspending trading in the stock market is not the solution as it would worsen the situation and deter foreign investors.
KUALA LUMPUR: Some brokers are calling for a suspension of short selling because there are loopholes on Bursa Malaysia’s updated regulations on the matter, as it is a measure that would bring about more stability to the stock market and reduce distortion to prices.
A seasoned broker who has been in the industry for more than 30 years said that although Bursa Malaysia has introduced the Uptick Rule since Tuesday, there were loopholes that allowed for short selling to happen.
The Uptick Rule generally states that short selling can be done only when the order price is at a prevailing best asking/selling price or higher. Specifically, traders cannot short-sell stocks and buy them back later for a profit.
But the seasoned broker said there were loopholes as brokerages held stocks through nominees that could be used for selling and creating a false sense of the stock’s price coming under pressure.
“Stocks that are held in nominee accounts can be sold causing the stock prices to fall. Later the short-selling traders will come in to buy the stocks. The entire process circumvents the existing rules put in place to prevent the abuse of short selling.
“Worse is they speculate false news on the particular stock through social media. It brings about a false sense of selling pressure and helps them to sell down the stock with minimal shares, ” said the seasoned broker.
“The worse outcome of short selling in extraordinary times is that the margins are thin but the repercussion on the stocks is deep, ” said the broker.
The Covid-19 outbreak has exacerbated the slowdown in the global economy, which in turn has caused turmoil in stock markets worldwide.
The broker said that suspending trading in the stock market is not the solution as it would worsen the situation and deter foreign investors.
“Look at the Philippines and the price it is paying for suspending the stock exchange. When the exchange is suspended, there is no way for foreigners to sell. It is bad, ” said the broker.
Another broker felt that the Uptick Rules introduced by Bursa Malaysia is sufficient for now as there is limited room for selling.
“However, a short-selling ban is not something that cannot be done in extraordinary times such as now when the market is behaving irrationally.
“Under the Uptick Rule, short selling can only happen when stock prices are on the uptrend. Also brokers cannot use the stocks in nominee accounts easily as it will be monitored, ” the broker said
However, the broker also agreed that the Uptick Rule will cap the upside in the movement of the stock.
The broker said short selling would allow investors to hedge their positions and create more liquidity to the market.
“Regulators and investors must understand that they cannot have a set of rules to cater for good times and one for bad times. People’s ability to hedge will be limited and it would bring about less liquidity, ” said the broker.
Several exchanges, especially in Europe, have resorted to suspending short selling after several attempts to prevent a panic selling failed. Circuit breakers have been hit multiple times but the panic selling continued, which caused the authorities in France and Spain to suspend short selling.
Other countries such as China has cut the reserve requirements for banks to add liquidity in the markets while US Federal Reserve is buying US$37bil of Treasuries and giving put trillions of short-term loans to bring about stability in the bond market.
https://www.thestar.com.my/business/business-news/2020/03/20/brokers-call-for-suspension-of-short-selling
