Published September 18, 2008

Time for SGX to consider disclosure of short sales

By LYNETTE KHOO
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IN a receding tide where everything goes under, the practice of short-selling has become more rampant. Abusive short-selling in the US is blamed in part for the demise of Lehman Brothers, and fears that it could hit other firms is prompting the US Securities and Exchange Commission (SEC) to extend and widen its temporary short-selling limits that expired last month.

This is not new. Short sales are already restricted in the Hong Kong and Australian stock exchanges under certain conditions. With the big boys having short-selling rules or looking to implement them for their larger markets, one wonders if SGX should follow suit.

An answer to this question is not easy. Given the lack of disclosure on short positions here, there is little indication of the overall short-selling activities here, except for anecdotes from individual brokerages. In a bull market, this may be less relevant. But in extreme bearish market conditions, this issue has taken on greater gravity.

Investors typically short-sell on borrowed scrip or do intraday shorting on 'naked' positions. Alternatively, investors can do a leveraged short over-the-counter using contracts for differences.

SGX currently has no restrictions on short-selling. Any move in this direction could possibly draw flak from free-market supporters - judging from market response to SGX's proposal in mid-2007 to discourage short-selling covered warrants. By the way, that proposal has since been left on the backburner.

But one could also argue that in exceptional times like these, there should be more protection for the regular investors from abusive short-selling in this opaque part of the market, where there is no disclosure on open short positions.

The weak performance of recent IPOs - many have tanked on their first trading days - is also prompting calls to ban naked shorts on them. The poor demand to subscribe to IPOs has also triggered market talk that some underwriters may resort to unorthodox methods to meet the minimum base of public shareholders.

Some say that SGX should draw lessons from HKEx, where short-selling restrictions cover stocks whose public float capitalisation is less than HK$1 billion, among other restrictions. Hong Kong's 'uptick' rule also limits the ability of short-sellers to build positions in a falling market by barring short sales below the best current ask price.

Probably, not everyone would agree with the potential curb by SEC on short-selling, and any unwinding by Asian bourses on their easing of short-selling rules during the good years.

When times are bad, it is easy to cry for protection against the downside. But one cannot know for sure if short-selling is exaggerating falls in Singapore shares unless some disclosure is made on short sales. And with the market biased on the downside, it is difficult for traders to profit on long positions. To restrict short-selling will do little to help stimulate liquidity.

In such market conditions, it is no surprise that there is little interest for IPOs now. One should remember that the demand for IPOs is also a function of reasonable pricing and the sectors they are in, as not all IPOs have been painted with the same brush.

There also appears to be no real evidence that IPOs on HKEx have held up better than those on SGX. A glance at the HKEx IPOs this year shows that about 50 per cent of them sank on the first trading day, similar to that on SGX, despite HKEx's restrictions on short-selling.

SGX is not without safeguards at this point. Naked short positions are usually covered intraday to avoid the risk of SGX buying in at a higher price. The Central Depository has to buy in against open positions by the end of the third trading day from the short-sale date at two bids higher than the last traded price.

Perhaps, before we call for further restrictions on short-selling, we need to first receive timely information on it. There are no rules governing disclosure of short sales currently, unlike in Hong Kong where the exchange collates data on borrowed scrip and releases a summary report twice a day. The Australian stock exchange also imposes obligations on brokers to report naked and covered short-selling to ASX for dissemination to the market.

Given the current market conditions, SGX should consider providing such clarity on short-selling positions here. This would give the market a better idea on whether short-selling is affecting Singapore shares the way it supposedly did on US financial stocks.