BIZ BUZZ: Short selling ‘baby steps’

The Philippine Stock Exchange may have closed down its trading floor last year after stockbrokers made the full transition to executing stock deals offsite at the height of the coronavirus pandemic, but that doesn’t mean that the physical space that used to host brokerage houses’ traders is now useless.

On Monday, the PSE inaugurated its new “events place” on the seventh floor of its headquarters in Bonifacio Global City. Gone are the cubicles, which used to house traders and, in their spread, the space has been transformed into a swanky open area, which guests can use during listing ceremonies.

The large electronic board that used to hang from the ceiling has also been removed, and replaced by a two-story high LED display, giving the entire space an airier feel that’s also more photogenic for public events.

But that change is only a small physical manifestation of the changes that the leadership of the PSE is implementing to keep the bourse relevant in the postpandemic environment.

Biz Buzz learned from its sources that preparations are now fully underway for the bourse to introduce the long-delayed idea of “short selling” in the local equities market—a plan that has been on the table since the late 1990s.

For the uninitiated, short selling involves the sale of stocks that one does not own (but has on hand after having been borrowed from another party who’s holding it as a long term investment) in the belief that the price will go down.

If the price does indeed drop, the seller can use the proceeds of the earlier sale to buy back more shares (since they’re now cheaper) and return the original number of shares to their owner. The short seller then keeps the excess shares for himself as his profit from calling the price decline correctly.

The plan has long encountered opposition from market players who are worried that short selling can be “weaponized” against companies listed on the bourse.

But the PSE has a solution to this.

Under the draft rules, only 10 percent of a listed company’s outstanding shares will be eligible for short selling at any single time. This will limit the drop that a company’s share price will have and deter supposed ne’er-do-wells who only want to create market chaos to profit from it.

The bourse is also proposing to limit short selling, for now, to the 30 biggest stocks on the market which are part of the PSE index. Doing so will ensure that only the most liquid stocks will be subjected to short selling.

As an additional safeguard, would-be short sellers will only be able able to short a particular stock on a price uptick, meaning that, like in the US, only the most committed short sellers will be allowed to do so (as one will not be able to force a stock price down by dumping shares to aggravate price declines).

Finally, and perhaps most importantly, the practice of “naked” short selling will be not be allowed, meaning one will not be allowed to sell shares one doesn’t have (and simply “cover” this “naked” position by buying at a lower price). One will have to borrow shares from someone (for a fee).

The big question is… will all these safeguards be enough to finally make short selling a reality in the local equities market? Abangan!

— Daxim L. Lucas