PSX warns against short selling, brokers dismayed

ISLAMABAD: Pakistan Stock Exchange (PSX) has warned stockbrokers against violation of short-selling through a notification issued here on Tuesday, however, brokers fear that this move will adversely affect market volumes.

The notice directed all Trading Right Entitlement Certificate (TREC) holders to comply with the clause 13.5.2 of PSX Regulations relating to the execution of blank sale in deliverable futures contracts (DFC) market.

PSX Acting Chief Regulatory Officer Abbas Mirza stated in the notice that, “PSX has observed that F-8 window, especially designed in the trading system for blank sale (short selling) is being used for executing sale transaction in the DFC market despite owning securities or having a pre-existing interest.”

However, the authorities and the brokers seem divided over the outcome. While the authorities believe that this move will help the index to improve in the future, brokers fear that volumes will drastically decline, damaging the already falling indices.

A senior official of the Securities and Exchange Commission of Pakistan (SECP) explained that short selling is allowed when the broker does not possess shares of the firm. He also said that the maximum limit for short selling for ay broker is up to 3 per cent of the overall free-floating shares of any company, whereas for each account holder the percentage comes down to 0.5 per cent.

“Usually, the share price is higher at the futures market so that broker sells shares of any company, but to make profit the brokers buys the shares of same company to square off its sale from the ready market when the prices are low,” the official said.

“But extensive selling has been observed in the future market and some brokers were selling at a limited quantity at low prices so that the impact of the reduced share price is visible at ready market too, this way they buy back the shares at low prices,” the official added.

The official added that without this speculative activity, the prices would improve and the index would start moving upwards.

It is pertinent to mention that the notice informs that brokers cannot short sell shares before the contract period ends, despite buying the same number of shares from the ready market.

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