PSX warns brokers to abide by short-selling rules

Updated May 02, 2019

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The authorities expect the move will help improve the index, but brokers fear that it would lead to further decline. — AFP/File
The authorities expect the move will help improve the index, but brokers fear that it would lead to further decline. — AFP/File

ISLAMABAD: Pakistan Stock Exchange (PSX) has issued a notice warning stockbrokers against violation of short-selling rules but brokers fear that the move will likely reduce volumes in the market.

The notice issued by the PSX directed all trading right entitlement certificate (TREC) holders to comply with clause 13.5.2 of PSX Regulations relating to execution of blank sale in deliverable futures contract (DFC) market.

The notice, signed by Acting Chief Regulatory Officer Abbas Mirza, states 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 pre-existing interest.”

The authorities expect the move will eventually help improve the index, but brokers fear that it would lead to further decline in volumes.

Explaining the situation, a senior official of the Securities and Exchange Commission of Pakistan said that short selling is allowed only if that broker does not possess share of that company.

The maximum limit for short selling for the broker is up to three per cent of free floating shares of any company, whereas for each account holder, 0.5pc of the free float is the maximum limit.

“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 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.

Meanwhile, some brokers have expressed displeasure over the move on the grounds that strict restrictions on short selling would eventually lead to reduction in trading activities.

“The volumes will further drop in the market leading to negative sentiment among the investors as well as brokers,” a broker complained.

On the other hand, the notice informs that brokers cannot short sell shares before the contract period ends, despite buying same number of shares from ready market.

Published in Dawn, May 2nd, 2019