MUCH has been discussed about last week’s stock market plunge that affected a handful of stocks.

       The big questions are when will the selling end, whether the local stock market will be badly affected and what lessons can be learned.

       First, a few things to note about the selldown.

       It was likely triggered by short selling. One theory is that the short sellers borrowed the shares from a foreign entity that provided Malaysian stock investors with a purchase facility.

       The short selling led to a decline in share prices, resulting in local stock-broking houses calling on their margin accounts and stopping brokers from trading such stocks, triggering the domino effect.

       The selldown continued last Friday and is likely to persist for some time.

       Not all the affected stocks have strong correlation with one another. Those that do involve varied companies and owners, which makes the selldown all the more peculiar.

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       These stocks rose to high levels at the start of the year. Many fall into the category of what market observers often refer to as speculative plays.

       Some of these stocks may have promising underlying businesses. But they’re just works in progress. None have strong institutional shareholdings, indicating that these counters are either too small or have yet to achieve sustainable earnings.

       These stocks are the only ones with heavy buying and selling activity, indicating that our local market is lacklustre.

       What now for these stocks?

       The major owners are scurrying to get funds to buy their shares but securing the funds is another matter and it will take time. Many are stuck with margin calls.

       Meanwhile, the selldown continues. The circuit breakers are only stopping the selldown temporarily. There is a case to be made for enhancing the circuit breakers, or more drastically, ban short selling.

       Late last year, South Korea banned short selling for about six months until June 2024.

       Chinese regulations have stringent margin requirements for short selling. In 2023, regulators increased the amount needed to 80% from the previous 50% for publicly traded securities and 100% for privately traded equities.

       Malaysia had also temporarily banned short selling in recent years during the Covid-19 pandemic.

       The ban on short selling has repercussions since it is considered a price discovery tool. International investors disapprove of such bans.

       That said, it is noteworthy that South Korean stocks soared after the ban late last year.

       Regulators are now trying to reassure investors that the local market will not see widespread selling, noting that the affected stocks constituted only 0.17% of total market capitalisation and 8.3% of total traded value.

       The stocks are being hammered largely by their own actions. A fair amount of these shares are being “warehoused”, meaning they are blocked from being bought and sold via broking houses.

       In fact, it is said that few remisiers are involved and make up the bulk of the trading activity of these stockbroking houses. Now with most of their lines cut by their houses, the musical chairs have stopped abruptly.

       A retail research head says this occurrence, like those in the past, separates the wheat from the chaff. Companies involved can bite the bullet and trade at their current lows and start to get their companies to show good earnings.

       That will slowly convince longer-term investors to buy into these companies and stabilise their share prices. That is what many well-performing listed companies do.

       This article first appeared in Star Biz7 weekly edition.