Short-selling data still falls short

When it comes to short-selling disclosure in the stock market, the goal is to provide investors with a realistic and fairly accurate picture of how widespread the activity is and by extension a handle on the level of bearish sentiment either in individual stocks or the market as a whole.

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Guanyu 道 said…
Short-selling data still falls short

R Sivanithy
14 March 2014

When it comes to short-selling disclosure in the stock market, the goal is to provide investors with a realistic and fairly accurate picture of how widespread the activity is and by extension a handle on the level of bearish sentiment either in individual stocks or the market as a whole.

To this end, Singapore Exchange (SGX) in March last year required trades which are short sales to be marked as such. The exchange then compiles this information in a report that is issued the following morning before the market opens.

As a follow-up to this marking of sell orders, the authorities last month proposed the implementation of aggregate position reporting and disclosure of significant individual short positions beyond a threshold that is yet to be determined.

The 2013 move and latest proposals represent an advancement over where the market was a few years ago, when there was absolutely no information at all on shorting activity and investors had to rely purely on speculation and hearsay.

The problem is that even after the recent proposals are implemented, the picture conveyed is still not as good as it could be. As always with disclosure, there is considerable room for improvement.

First, even though dealers are obliged to mark their short trades when they are entered, some have reported that when prices are moving quickly or when clients ring and demand swift execution, this requirement is ignored because time is of the essence. This means that the daily reports could understate the number of trades marked as short and that this discrepancy could be greatest when the market is hot and volatile, which is arguably precisely when accurate figures are needed.

Second, there is only limited value in publishing the report the following day as traders would not be able to easily correlate the figures to see how much of volume done in either an individual stock or the whole market was due to short selling.

Third and possibly most important is to note SGX has cautioned on its Web page that information gleaned from the marking of short sales data may not reflect outstanding shorts because it would include trades which have since been squared off by offsetting buy trades.

What this means is that as things stand today, not only is SGX’s short summary released a day late, it may be understated and does not properly show outstanding positions. In other words, it only offers a very rough gauge of bearish sentiment and could be of questionable value.

To compensate for all these limitations, the exchange should append a twice-daily scrip borrowing/lending (SBL) summary to give investors a fuller picture of which stocks have been lent out, most probably for shorting. The first report should be at midday, followed by the full-day summary as soon after 5.10pm as possible.

The starting point for collating this information should be SGX’s own SBL business. According to its website, there are about 600 securities eligible for borrowing and lending, and 11,600 participating investors lending through SBL to 18 financial institutions.

When studying SBL disclosure, guidance should come from the Hong Kong model, where only designated securities, that is stocks for which scrip can be borrowed, can be shorted.

The designated list is revised every quarter and currently contains 695 stocks. Among the requirements for designation is a market capitalisation of at least HK$3 billion (presumably to protect small-cap stocks from falling victim to shorting) and an aggregate turnover during the preceding 12 months to market capitalisation ratio of more than 50 per cent.

The HK exchange publishes two short-selling reports every day so investors can keep close tabs on trends and changes in short positions. Whether or not these reports are useful is of course debatable, but at least there is some assurance that the data is as accurate as possible.
Guanyu 道 said…
The same consideration should apply here, given that the present practice, even after being enhanced by the new proposals, may not paint an accurate or useful enough picture.

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