Hefty penalties for naked short selling

Hefty penalties for naked short selling
 
More disclosure to be made to maintain orderly market
 
By Lee Su Shyan , ASSISTANT MONEY EDITOR 
  
SGX’s curbs on short-selling follows bans by the US, Britain and Australia. — PHOTO: AGENCE FRANCE-PRESSE

THE Singapore Exchange (SGX) has moved to put the brakes on short-selling shares although it has stopped short of imposing the draconian bans seen in Britain, the United States and Australia.
Short-sellers aim to capitalise on falling prices with investors borrowing shares in the hope of buying them back at a lower price.

The SGX announced last night that it will disclose more details about shares that have been sold short without the same number having been borrowed in advance - known as naked short-selling.

The additional transparency will give traders a clearer idea of what shares are in play and at what price.

It will also crack down hard with hefty penalties on the practice of naked short-selling. This differs from normal short-selling as it involves traders selling stock without having even borrowed the shares in the first place.

Traders face a penalty of 5 per cent of the failed trade, starting at a minimum of $1,000. Another penalty kicks in at $50,000.

The move takes effect from Thursday.

To illustrate the new rules, it is useful to see how the system works now.

Take a case where a trader does naked short-selling, which is selling shares he does not own without buying them within the same day. The SGX will step in after three days and buy the stock on the trader’s behalf in what is called the buying-in market.

But it will buy at two bids higher than the last-transacted market price. This penalises the short-seller as the price will likely be higher than the price he sold at. The trader also pays a $30 per contract processing fee.

The new rule also slaps the trader with a minimum $1,000 fine.

Another new penalty will hit those short-selling in the buying-in market, although market observers say this would be rare.

Traders could be slapped with a penalty of $50,000 and face disbarment from participating in the buying-in market.

Another move announced yesterday will see SGX improving the disclosure of such trades, although it maintains that despite the market turbulence, trading has been orderly and settlement has been timely.

With effect from 11am today, the SGX will publish, daily, the list of stocks in naked short-sales and the amount that is required to be bought in.

‘This will make dissemination of information more efficient than the current practice of having the information relayed through brokers who participate in the buying-in market,’ the SGX said yesterday.

On the following day at 8.30am, the SGX will publish what has been bought in, the volume and the value.

Dealers said the SGX’s move sends a clear signal to the market that naked short-selling will not be allowed.

Another dealer speculated that there could be some relief for penny stocks which have been severely sold down. One analyst said ‘this could offer temporary relief for the banks’.

The measures will be reviewed after a month.

Short-selling has been blamed for driving down the prices of the financial institutions in the US and Britain to the point of near-collapse.

Bans on short-selling financial stocks were introduced in the US and Britain last week while Australia yesterday banned the short-selling of all shares.

 
Source : Straits Times  - 23 Sept 2008

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