#Title

Harnessing benefits of short selling
MD ASHEQUR RAHMAN
The global financial stage witnessed two starkly contrasting approaches to short selling recently as South Korea and the Philippines charted their courses.
South Korea implemented a comprehensive ban on short selling until June 2024, marking the second time in two years such a measure has been taken. The Financial Services Commission cited the need to stabilise the market and protect investors.
Notably, the timing of this ban, just ahead of general legislative elections, suggests political motivations in response to retail investors’ protests. With one in five Koreans holding a trading account, this political undercurrent adds complexity to South Korea’s short selling ban.
In stark contrast, the Philippines embraced short selling as part of a broader effort to enhance stock market trading and liquidity. Ramon Monzon, president of the Philippine Stock Exchange, emphasised the importance of short selling in hedging against economic and political uncertainties.
The Philippines faces challenges, including a nearly 40 percent drop in daily stock transactions over the past decade and a sixth consecutive year of declining foreign equity investments, a situation eerily similar to Bangladesh’s Stock Market.
These disparate approaches illuminate the multifaceted nature of short selling, presenting both benefits and ethical concerns.
Bangladesh, where the capital market relies on long equities, lacks efficient risk-hedging mechanisms. To address this gap, the introduction of financial instruments like exchange-traded funds, index futures, and short selling, legislatively enabled but awaiting supporting infrastructure, is essential.
Short selling involves speculating on a security’s price decline. It boosts market liquidity, promotes efficient stock pricing, and acts as a check on market manipulation, preventing sudden rises of “bad” stocks and correcting irrational overpricing. Additionally, short selling serves as a risk management tool, enabling investors to hedge against potential losses associated with long positions.
However, the crucial aspect for regulators in embracing short selling is to eliminate “naked short selling,” where shares are sold without borrowing or locating them first. This practice, a major reason behind South Korea’s troubles, introduces significant risks, including market manipulation, counterfeiting, and increased volatility, disproportionately impacting investors.
As Bangladesh contemplates a short selling policy, a conservative yet prudent approach is vital. The introduction of short selling has transformative potential, increasing efficiency and liquidity while mitigating excessive risk-taking.
Regulations and supervision are paramount to preventing market abuse and fraud, with a focus on prohibiting naked short selling. For this, collaboration among regulatory bodies is crucial.
Simultaneously, the archaic floor price rule, which artificially prevents stocks from falling below a specific price, must be abolished to encourage transparent market dynamics, reduce price distortions, and stimulate trading activity.
Globally, short selling is approached diversely, with South Korea opting for a politically motivated ban, and the Philippines embracing it for trading enhancement. As Bangladesh formulates its strategy, a delicate balance between innovation and regulation is necessary.
Avoiding the risks associated with naked short selling while harnessing the benefits of short selling can stimulate growth, instill investor confidence, and establish a resilient foundation for Bangladesh’s financial future. Through these deliberate measures, Bangladesh can navigate short selling to foster a robust financial future.
The author is managing director of Midway Securities Ltd.