PETALING JAYA: The resumption of intraday short selling (IDSS) and intraday short selling by proprietary day traders (PDT Short Sale) in January 2022 will have minimal impact on the overall market, according to Bursa Malaysia director of securities market Azhar Mohd Zabidi.
Azhar said historically, IDSS and PDT Short Sale in aggregate are not more than 3% to 3.5% of total market trades.
“So, the anticipated impact to the overall market will be minimal. We do anticipate that with the introduction of enhanced control measures, we could see a reduced level of trades compared to before, especially among the day traders,” he told StarBiz.
Azhar emphasised that the enhanced control measures were necessary and important, as they aimed to limit the movement of stock prices and the number of shares that could be short sold.
The Securities Commission (SC) and Bursa Malaysia had suspended IDSS and PDT Short Sale on March 24, 2020 as part of the regulators’ proactive measures to mitigate potential risks arising from heightened volatility and global uncertainties at the start of the Covid-19 pandemic.
With the lifting of the suspension effective Jan 1, 2022, the PDT temporary waivers related to PDT Short Sale will no longer be applicable.
Also, in addition to the current short selling limits, IDSS and PDT Short Sale orders must be entered in accordance with the “at-tick rule”.
Under the automated application of the “at-tick rule”, short selling orders will be executed at the best current asking price or higher.
Also, PDT Short Sale is limited to a list of Approved Securities (Main Market only) and PDTs need to have Securities Borrowing and Lending (SBL) agreement in place that requires the short seller to have in place an agreement to borrow stock in the event the short seller is forced to deliver.
Bursa Malaysia
There were 258 stocks on the list of Approved Securities (Main Market only) as of Nov 29, 2021.
Azhar explained that essentially, the “at-tick rule” requires a short seller to offer to sell a specific stock at not less than the lowest price offered on the sell queue on Bursa Malaysia’s order book.
“For example, the queue to sell shares in ABC Bhd is currently at RM1.04, followed by RM1.03 and RM1.02. The short seller can only offer to sell at RM1.02 or higher. They are not able to offer a lower price than RM1.02, which is the lowest price in the queue. This is monitored by Bursa Malaysia. So, a short seller is unable to push the price beyond what is available in the system. He cannot say, ‘I sell ABC Bhd at 98 sen’,” he explained.
Also, for each stock that is short sold, there is a daily gross limit of 3% of outstanding shares (for RSS or Regulated Short Selling, IDSS and PDT Short Sale), a daily price limit of 15% (if the share price is more than or equal to RM1) or 15 sen (if the share price is less than RM1 for IDSS and PDT Short Sale), as well as a net short position which refers to not more than 10% of the outstanding shares (for all categories of short selling).
“All these rules are in place to protect and safeguard against excessive short selling activity,” said Azhar.
Regarding the previous suspension of IDSS and PDT Short Sale, Azhar explained that it was intended as a short-term measure introduced in March 2020 to provide stability and confidence in the marketplace.
“At the very beginning, there was very little visibility as to how long the pandemic would last and its magnitude on both the domestic and global economy. The ban on RSS was lifted a year ago on Jan 1, 2021.
“Since then, we have monitored RSS activities which have not demonstrated any unusual or adverse activities. We also monitored other domestic and global developments affecting the securities market,” he said.
As such, the re-opening of most sectors of Malaysia’s economy towards achieving normalisation, coupled with the success of the national vaccination rollout which covers nearly 98% of the adult population as of Dec 29, 2021, prompted the regulators’ to lift the suspension.
Azhar reminded retail investors that short selling is not typically a means to make a gain, or a return “such as you would expect from an investment – say like when you buy a stock”.
“Short selling is tool for investors to manage risk. It allows investors to hedge their position, not necessarily for a gain, but to compensate for a loss in a long position. Short selling allows for better price discovery and acts as a check and balance especially when prices become inflated. In other words, it helps to price stocks more efficiently,” he said.
Azhar pointed out that there is a misconception that short selling pushes prices down (as the term suggests).
“And this obviously influences retail investor sentiment toward short selling. Especially when some markets are less regulated, and you can see how stock prices tumble. But that does not happen here given the controls put into place,” he said.
“In emerging markets such as ours, short selling activities are very regulated. So, there are limits as to how short selling can impact a stock price. On Bursa Malaysia, restrictions are put in place in order to limit movement in stock prices as well as the number of shares that can be short sold,” explained Azhar.
He also pointed out that the movement of stock prices are influenced by numerous factors including external factors such as United States’ interest rates, internal factors such as taxes and stamp duty, trends (look at what happened to glove stocks last year), events (tsunami, flooding), and news flow specific to the company or the sector a company is involved in.
“All major markets allow for short selling. It is a facility or a tool that is expected of a maturing market such as ours. But each exchange has its own rules and controls on short selling that are designed to cater for its own market ecosystem,” said Azhar.