By Arra B. Francia
THE PHILIPPINE Stock Exchange, Inc. (PSE) has secured the green light for short-selling, a move designed to further increase market liquidity.
In a memorandum posted on its website last Friday, the PSE said the Securities and Exchange Commission (SEC) approved the guidelines for short selling on June 5. The guidelines add to Article IV, Section 5 of the Revised Trading Rules of the PSE, which set general rules for short sales.
“We are optimistic that this facility will lend support to our securities borrowing and lending program and help improve liquidity in our market,” PSE President and Chief Executive Officer Ramon S. Monzon was quoted as saying in a statement.
The PSE defines a short sale as the “sale of a security which the seller does not own or any sale which is consummated by the delivery of a security borrowed by, or for the account of the seller.”
The approved guidelines state that only PSE index (PSEi) members and exchange traded funds are eligible to engage in short selling.
Only 10% of the outstanding shares of an eligible security can be sold this way. The PSE said this limit will ensure orderly short selling “while still providing ample room for price discovery.”
Mr. Monzon noted further that the guidelines will ensure that transactions are transparent and effectively monitored.
“Even with a limited number of eligible securities and a cap on short interest to begin with, we believe that the ability to take short positions will further spur trading activity and attract more investors to our market,” Mr. Monzon said.
Trading participants welcomed the move.
“The concept is good because it will help stabilize price fluctuations and add liquidity to the market,” Regina Capital Development Corp. President Marita A. Limlingan said in a mobile phone message.
UPCC Securities Corp. trader Aristotle D. Reyes, Jr. said this will attract more foreign investors to the market who have otherwhise shunned the local market due to liquidity concerns. “It will have a positive effect on the market as a whole most especially on the index stocks as it will increase the volume of the market and will add liquidity… But I’m not sure about retail investors…It will really depend on the guidelines that regulators will release. So it’s still a wait and see but nonetheless it’s a good development for the equities market,” Mr. Reyes said in a separate text message.
China Bank Securities Corp. Research Director Garie G. Ouano, however, cautioned that short selling could also lead to more volatility. “It’s positive in the sense that both positive and negative insights will now be fully actionable but the downside is that it could lead to a more volatile market,” he said.
The PSE will conduct briefings before launching the program.
“Once we launch short selling, investors will be able to employ this tool to help them hedge their portfolio risk,” Mr. Monzon said.