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Implementation of short selling may be ‘challenging’

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COURTESY OF PHILIPPINE STOCK EXCHANGE, INC.

By Revin Mikhael D. Ochave, Reporter

THE much-awaited implementation of short selling may face challenges, as the local stock market is still “very illiquid” and remains small compared with other markets, experts said.

COL Financial Group, Inc. Chairman and Founder Edward K. Lee said short selling may be difficult since the local market is not yet fully developed and the number of investors is still small.

“The volume of the Philippine market is still very illiquid. If it is illiquid, it is very difficult to short sell,” Mr. Lee said in a mobile phone interview.

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PSE President and Chief Executive Officer Ramon S. Monzon earlier said the exchange is looking forward to implementing the short-selling program this year. However, he said the PSE will still have to address concerns by foreign investors on the securities borrowing and lending (SBL) program rules.

Short selling is the sale of a stock that is not owned by the investor, but will be settled by the delivery of a borrowed stock. An investor can generate a profit by selling the borrowed stock, and then buying it back when the price declines.

“When you are shorting markets, it is a different ball game. You can have unlimited losses,” Mr. Lee added.

A risk in selling short is that one can lose more than the original investment. A short seller’s loss potential is unlimited since there is no cap on how much the stock price can rise.

“In short selling, you are not in control. Short selling is more volatile. You have to be more careful,” Harry G. Liu, Summit Securities, Inc. president, said in a phone interview.

Mr. Liu said it is important to have safeguards in place.

“The person who sold has to have the guarantee that he can buy back and pay for the difference. There should be safeguards on short selling in terms of the ability to buy back at a certain time. Because of the volatility of the price, hindi mo masabi – if you short one million, and the market is very thin, you might not be able to cover the whole thing immediately, di ba? The ability to cover is very important,” he said.

However, Mr. Liu said short selling has its role and can be very helpful for the local bourse.

“Short selling will prevent the market from crashing very fast because the person who sold will have to buy back (the shares). It can be a mechanism to be able to create buying support,” he said.

Meanwhile, Regina Capital Development Corp. Head of Sales Luis A. Limlingan said the introduction of short selling will help stimulate investor demand.

“New products mean new avenues for investment and more diversification,” Mr. Limlingan said in a mobile phone message.

For Timson Securities, Inc. Head of Online Trading Darren Blaine T. Pangan, short selling would be beneficial to investors since it allows them “to hedge the risk that naturally comes with a ‘long-only’ portfolio, especially when market downturns come into the story.”

“Similar to going long, shorting stocks also requires careful research and due diligence as it may also work against traders and investors,” Mr. Pangan said in a mobile phone message.

Before implementing short selling, PSE’s Mr. Monzon said there are three items that need regulatory clearance, namely: SEC’s approval of the Philippine Depository and Trust Corp. (PDTC) as a lending agent; the SEC’s approval of identified offshore assets as collateral for foreign SBL participants; and the go signal from the BIR for the use of Global Master Securities Lending Agreement (MSLA) for foreign participants instead of the local MSLA.

“While there are no more pending items on the short selling program, it has a lot of dependency on the SBL program,” Mr. Monzon said.

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