Two Sides of Short Selling
2010/04/21 1 Comment
Two Sides of Short Selling
Look around. Is there anyone who wants to get a fortune or free money? Here is a tip. It’s short selling, which you can get money in the fastest way. But, there’s one important thing that you must remember before you try. When market is unstable, short selling would be possibly used as a method of making market like dropping in price artificially and it causes a hugely vicious cycle.
Short selling (also known as shorting or going short) is the practice of selling assets; A short seller can borrow the security and sell it, expecting that it will be cheaper to repurchase in the future. When the seller decides that the time is right, the seller buys equivalent securities and returns them to the lender. A short seller typically borrows through a broker, who is usually holding the securities for another investor who owns the securities. The short sellers expect profits from a decline in the price of the assets between the sale and the repurchase, as the seller will pay less for buying the assets that sellers received. For better understanding, here’s a well-organized description.
In short, short-sellers borrow stock and sell it with the expectation that the price will fall. The short-sellers then buy back the shares at a lower price, pocket the margin and return the shares to the original owner. After the global crisis in 2008, short selling has been criticized of inciting drop in stock prices in a bearish market and several financial authorities set to regulate this shorting with various ways.
How to deal with regulating short-selling
Let’s figure out how the world controls short selling, then. Which countries that will be handled are the U.S., Europe, Hong-Kong and South Korea.
A. The U.S.
According to SEC (Securities and Exchange Commission), if price of share dropped by more that 10% per day, SEC limits to quote a price under a market rate in cast of going short. This is so-called revised ‘Uptick-rule’, which will be in force from April of this year, applies to the next day of trading.
In case of Europe, Committee of European Securities Regulators (CESR) at Pan-Europe level, plans to propose measures detailing to impose the posting responsibility for short selling, in order to improve market transparency. One of the major details is to report to the supervisory authorities if net short position of investors is exceeded a number of listed stocks by 0.2%. More intensely, if net short position is exceeded by 0.5% or additionally increased by 0.1% from original value, listed companies have to make those facts into the public.
Hong Kong’s financial regulator also unveiled a new regime for disclosure on short selling. The Securities and Futures Commission (SFC) plans to force equity market participants to submit weekly reports detailing any short positions over certain thresholds. However, these “trigger levels” are set much lower than those found in New York of London.
D. South Korea
Lastly, Financial Services Commission (FSC) has allowed covered short selling of non-financial stocks to be possible from June 2009 after market has been stabilized in. In addition, most of the developed markets has loosen regulations on short selling, but naked short selling is still specified as principally prohibited in Financial Investment Services and Capital Market Act (FSCMA).
This short selling issue should be carefully dealt with. Although there are positive aspects such as 1) providing liquidity to the market and sufficient supply in need of excessive buy order, 2) efficiently fixing a price from short selling, there exists possibility of being misused in the market. If short selling sharply surges, it could give stock prices a significant drop and place at a lower price. To rebuild financial crisis which hit the world enormously, stock market needs to be stable at first and an activated speculative trade must be under strict regulations. To prevent an act of too much profiting, all of the countries should carefully keep their eyes open to control such an damaging behavior. Keep in mind that one more shot harms an entire economy.
Min Young Kim