Challenges seen in new short-selling rules

The coming short-selling reporting requirements on the Singapore Exchange (SGX) could pose qualitative and operational challenges when they take effect in March, complicating the expected benefits of greater transparency, market stakeholders have said.

Starting March 11, brokers who enter a "sell" order on SGX must declare whether the shares being offered are short, or not owned by the seller. This includes both covered shorts, in which the seller has already secured those shares by borrowing, for example, and uncovered shorts, in which the seller has yet to arrange for possession of those shares.

SGX will publish the data every day, showing the volume and turnover of shorts on an aggregate basis for every stock listed on the exchange. It said in practice guidance on its website: "SGX's trading members must put in place systems and procedures to collect such 'sell' order information from investors."

But something as simple as declaring whether a trade is short can be deceptively complex when it comes to implementation.

First of all, investors have to figure out exactly what defines ownership of shares. For example, what if the investor has bought the shares but has not taken delivery of said shares?

(The exchange says such shares will count as owned by the investor.)

Or what if the investor has an outstanding, unfilled "buy" order at the time of placing a "sell" order?

(To this, SGX says unfilled "buy" orders do not count as part of the investors' existing holdings.)

Maybank Kim Eng Securities chief executive Tan Pei-San, who also raised concerns for certain institutional investors, said implementation will be "quite challenging".

"It involves some modifications to trading systems to allow clients to tag a trade as 'short'," he said.

"More significantly, it should entail some changes to the way clients operate and trade the markets. The reporting is on a per-trade basis, not a net basis, which may pose issues for institutional trading desks and high-velocity traders," he added.

In a sign that SGX is aware of the issues about misreporting, it is giving investors up to the close of the next trading day to amend wrongly marked trades that have been executed.

Investors who wrongly report the nature of their trades will be subject to statutory penalties under the Securities & Futures Act, but brokers stressed to BT that they have no way to verify whether their clients are telling the truth. The fact that marked trades can be amended up to one trading day later is just one of many limitations to the usefulness of the published data, observers said.

Mr Tan said: "There are various kinds of short transactions which the data will not differentiate, such as short trades which are covered intra day.

"By lumping such trades into the data, it may give an inflated impression of open shorts in the counter."

Another broker, however, said that the intention of shorting, regardless of whether the short sale is eventually matched or covered, could be good enough to give an indication of sentiment in a stock: "The quality of information is there because you just want to know at a particular moment in time how many people want to short sell the stock."

The broker added that investors also need to understand how to use the data - the short-selling figures should only be a piece of a comprehensive analysis, and investors should not simply follow the data at face value.

Questions have also been raised about whether alternative reporting methods could be more useful. For example, mandating short reporting only when short positions exceed a certain threshold of a stock's share capital or average volume could potentially reduce some of the noise in the data.

The SGX spokesman said: "SGX consulted on the imposition of reporting obligations on holders of substantial short positions for individual counters.

"The majority of respondents support the proposed reporting of substantial short positions. However, some respondents objected due to the potential for increased imitative behaviour following the publication of such statistics. After consideration of responses from the public consultation, SGX decided to not adopt the requirement to report substantial short positions."

Mr Tan reckoned that the market and its stakeholders are ultimately just trying to find the best solution to a complex issue.

"There are many ways that have been developed across markets on this issue, such as reporting, uptick rules, restriction of availability of stock borrow for counters below a certain threshold, etc," he said.

"There is no perfect way and a method that works in one market may not work elsewhere because of particular nuances of that market."