BIZ BUZZ: Wanted: Unrestricted short selling

After decades of delays, short selling is finally coming to town, allowing investors to make two-way bets, hopefully boosting market turnover. But even some of those who are short selling advocates have apprehensions on how the rules are shaping up.

One of them is capital market veteran Anton Periquet, a well-esteemed analyst turned investment banker, who is concerned that in trying to err on the side of caution, regulators are writing the framework to be “too restrictive,” defeating the whole purpose of it.

Periquet told peers that the proposal to limit short selling to only index stocks, for instance, is “counterintuitive.”

In a conversation overheard by Biz Buzz, Periquet explained, “With a few exceptions, index stocks are the most transparent, widely researched and liquid counters and therefore already trade at or close to their fair values. It is the less liquid stocks that are likely to be mispriced and in need of more active two-way trading to facilitate more efficient pricing.”

More often than not, he said retail investors are being sucked into massively overpriced small-cap stocks. Had short selling been permitted decades ago, Periquet believes that BW price manipulation of the 2000s would not have had any leg to stand on.

“As for limiting the number of shares that will be made available for shorting to 10 percent of a company’s issued shares, these are like taking baby steps. If we wish to improve market liquidity and promote true price discovery, why not go all the way? In the event that short sellers were to depress the share prices of SM or Ayala to unrealistic levels, wouldn’t their controlling shareholders happily buy up the shares?” he argued.

As a bonus, Periquet said short-selling allows long-term shareholders like pension funds Government Service Insurance System and Social Security System to make money on their holdings through stock lending, while major shareholders would welcome the extra revenues from lending out stock to short sellers in exchange for a fee.

Periquet also belied the common notion that short selling creates unwanted volatility by inducing wild swings. As traders with opposing views about the future offset each other’s positions, greater liquidity and, hence, fewer price spikes are expected, he said.

“Consider: In times of irrational exuberance, is it not the short-seller who caps unwarranted spikes in share prices when he bets that overly rosy expectations cannot be met? In times of panic, is it not the short-seller who prevents a free fall, as he must at some point cover his short position?”

Finally, Periquet argued that the short seller is actually the regulator’s best friend—one who can deter unscrupulous operators and spot fraud or overly aggressive accounting practices while hunting for overvalued stocks.

“Just look at the most celebrated cases abroad: Enron, Worldcom, Tyco and, more recently, Adani and Icahn. It is the short-seller, not the regulator, who raised the alarm over the nosebleed valuations. And why should anyone be surprised? It is short seller, after all, who has the incentive and resources to uncover anomalies before they blow up. In this sense, the short-seller actually performs a public service,” he said.

—Doris Dumlao-Abadilla

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