As of this writing a press release from PSE have already announced that finally "short selling" can already be done in the Philippine stock market as it has secured approval from SEC. You may read full details here.
Well this might be new to some traders or investors who just happened to venture into the stock market but on the other hand this is no longer new to those who are into Forex trading.
So is it good news or bad news? It's hard to say but somehow let's just first try to look out some guidelines what type of stocks can be shorted.
As per PSE only members from the index can be shorted or in other words those top 30 companies that comprise the index or simply "blue chips".
Also only 10% of its outstanding shares can be shorted meaning aside from securities being limited as eligible securities for short selling they also placed a cap as to safeguard the orderly conduct of short selling activities as stated from its press release.
Moreover here's a view of the guidelines provided when short selling in the market (PSE) and you may download pdf file from link provided.
GUIDELINES FOR SHORT SELLING TRANSACTIONS (pdf here)
1. Eligible Securities
a. All PSEi member companies and exchange traded funds are deemed Eligible Securities.
The Exchange may review and amend the criteria for Eligible Securities from time to time, in support of securities borrowing and lending activities and to manage risk.
b. An Eligible Security must maintain a ratio of short interest to outstanding shares (“Short Interest Ratio”) at less than or equal to ten percent (10%) (“Short Interest Threshold”) or as may be prescribed by the Exchange. Any change in the prescribed Short Interest Threshold shall be subject to prior approval of the Securities and Exchange Commission.
An Eligible Security which breaches the Short Interest Threshold will become ineligible for short selling until such time that its Short Interest Ratio falls back within the prescribed limit.
The “short interest” or the “outstanding short position” refers to the cumulative number of shares of a security sold short that have not yet been closed out, and adjusted for corporate actions as may be applicable.
c. The Short Interest Ratio of an Eligible Security shall be monitored daily. Changes in eligibility status shall be announced at the end of each trading day and shall take effect on the next trading day.
d. At the end of each trading day, the Exchange shall publish on its website the gross short selling transactions and outstanding short position of Eligible Securities traded on the Exchange.
2. Execution of short selling orders
a. The trading system shall not accept Short Selling orders for ineligible securities.
b. Only Trading Participants are allowed to enter Short Selling orders. Clients who want to place Short Selling orders must course these orders through their respective Trading Participants.
c. Prior to entering the Short Selling order, the Trading Participant shall determine that the client has entered into the necessary borrowing arrangements for the Eligible Securities subject of the Short Sale.
d. For Trading Participants whose clients have direct market access (DMA), the Trading Participant shall still enter the Short Selling order on behalf of the DMA client. However, if the Trading Participant has the capability to determine that its DMA client has borrowed the subject securities prior to the entry of any Short Selling order, and upon compliance with such requirements that may be imposed by the Exchange, then the DMA clients of said Trading Participant may be allowed to enter Short Selling orders without the intervention of the Trading Participant.
e. Short Selling orders shall not be accepted during the following trading phases: Pre-Open, Pre-Close and Run-Off/Trading-at-Last.
f. Short Selling orders shall be entered as day orders only.
g. Trading Participants shall not aggregate Short Selling Orders.
h. Short Selling orders for the Odd Lot Market and Block Sales shall not be accepted by the trading system.
3. Uptick Rule
Trading Participants must comply with the uptick rule under Section 3 of SRC Rule 24.2-2 and Section 5.2(b) of the Revised Trading Rules of the Exchange, or relevant revisions thereto.
4. Flagging and Trade Amendments
a. A Trading Participant shall flag Short Selling orders accordingly.
b. If an Eligible Security subsequently becomes ineligible, no Short Selling orders shall be accepted by the trading system on such Security.
c. A Trading Participant shall not be allowed to amend a trade from Short Sale to a regular sale and vice-versa.
5. Securities Borrowing and Lending (“SBL”) Procedures for Short Selling Transactions
The requirements of the PSE and the Securities and Exchange Commission on SBL should be complied with by the short seller for purposes of complying with the PSE Trading Rules prohibition against “naked short sales”.
a. A depository participant that transfers shares to another depository participant for Short Selling transactions shall indicate “SBL Borrow – Short Selling” or, for Buyback transactions, “SBL Return – Short Selling”, in the depository’s system.
A Buyback transaction shall be understood to be a buy transaction that is executed for purposes of closing or covering a short interest.
b. For transfers of shares of clients within a depository participant’s omnibus account for short selling and buyback transactions, the depository participant shall report such transfers to the Exchange in such format and manner as the Exchange may prescribe.
6. Responsibility of Trading Participants
A Trading Participant shall be responsible for all Short Selling orders that are entered into or executed in the Exchange, regardless of whether such orders are for its own account or for its client’s account
7. Violations and Penalties
Violations of the relevant provisions of the Revised Trading Rules on Short Selling, these Guidelines, and any amendments thereto shall be penalized in accordance with Article IX of the Revised Trading Rules.
The Trading Participant shall also continue to be bound by the other provisions of the Revised Trading Rules and any amendments thereto, as may be applicable, and shall be held liable for any breach of such rules and regulations.
Now that you have been provided with the guidelines, since we are all familiar with our normal trade of buying low and selling high strategy as most of us would do, you may ask how does short selling works.
Short selling is the reverse we sell high then we anticipate any drop in price and buy on lows to make a profit, taking note that we don't own these shares or securities but we just borrowed them from our brokers or other investors and we might be required as well to have margin accounts from our broker as a form of collateral to ensure that shares will be returned at some point.
Make sure to read any guidelines on the process with your own respective brokers on how to borrow those securities that you will try to short or simply try to coordinate with your own brokers for details and wait for further info from PSE if margin accounts will be mandatory in short selling for collateral purposes.
To illustrate "short selling" sample (disregarding any fees) say we are allowed to borrow 20k shares of MEG then the current market price to date is playing around ₱4.50 upon borrowing we will sell it at the current market price of ₱4.50/share that would be amounting to ₱90k.
If our own judgment will favor our side that the price will continue to fall say at ₱3.90/share we may simply buy back the 20k shares at this range which will amount to ₱78k, thus we can now return the 20k shares which we borrowed as we keep the profit by getting the difference of ₱90k less ₱78k resulting to ₱12k from our transaction.
Quite simple right? Well of course as long as you make your own research and good understanding on trends then it might work for you, not making any plans before trying to short sell will also hurt your portfolio if the trend goes against you.
The risk is what if you were wrong, what if the stock suddenly bounced back to ₱5.00 a share? Definitely you will lose ₱10k in an instant since take note you need to return back the 20k shares you borrowed to your broker and if you buy at this price range definitely you will cover up the ₱10k loss from the price difference (₱90k-₱100k=-₱10k).
Depending on our own PSE if they will adapt those provisions set by the Federal Reserve Board on margin accounts for short selling then for every position we intend to short sell at least we must have 150% of the value of the position in our margin account.
Say you are going to short a stock with value of ₱90k, an additional 50% margin is required which is ₱45k, a total of ₱135k to your margin account which your broker will lend to you.
So the concept to make a profit from short selling is to make sure you will be purchasing back the (borrowed) number of shares lower from the price you sold those shares earlier, else you will need to cover up any losses incurred, if you sold at ₱9/per share you must repurchase at ₱6/share not buying on price levels like ₱10-and up unless you will make your cut loss.
Your stop loss/cut loss will be at the top whereas on normal trades stop loss/cut loss is from below and most traders are hoping that automatic stop loss should be also implemented in our trading platforms now that short selling is now approved.
Now that short selling has been approved will it add up to the volatility to the market now that you are given options to make some opportunities to make some profit not only on Bull market but on bear as well?
If this short selling was early introduced last year and if not limited to blue chips maybe many have profited big time from CHP and X (Xurpas).
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Let's see how short selling will bring an impact if majority will still play the traditional way or will try to make a shift to short selling on bear trends.
Final say is, are you ready for a change?If yes then make sure to do your own homework if you will try your shot on short selling.
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