Intraday Short Selling: Here to Slay or to Stay?

Addy Herg provides an overview of Bursa Malaysia’s latest initiative.

INTRODUCTION
 
On 6 February 2018, the then Prime Minister of Malaysia, Dato’ Seri Najib Razak, announced several initiatives to stimulate the Malaysian capital markets, one of which was the introduction of intraday short selling (“IDSS”).
 
IDSS was launched on 16 April 2018 with the necessary amendments being made to the Rules of Bursa Malaysia Securities (“BMS Rules”), Directives issued by Bursa Malaysia Securities Berhad (“Bursa Malaysia”) pursuant to the BMS Rules and the Participating Organisations’ Trading Manual. A set of Frequently Asked Questions for the BMS Rules in relation to IDSS (Version 1 Apr 2018) was issued at the same time.
 
WHAT IS IDSS?
 
IDSS allows a party to sell first and buy the securities later. This enables the seller to profit from the difference in the price at which the securities were sold and the price at which they are subsequently purchased to meet his delivery obligation in respect of the sale, if the price of the securities has declined after they were sold.
 
In an IDSS, the seller must close off his sell position with a buy position in respect of the securities on the day on which the short sale is executed.
 
A short sale differs from the traditional norm of “buy low and sell high” commonly seen in the stock market, whereby an investor buys securities at a low market price and sells them to make a profit when the market price goes up.  
 
WHO CAN PARTICIPATE IN IDSS?
 
Any person who is a client of a Participating Organisation (“PO”) may participate in IDSS, subject to his compliance with the prescribed requirements under the BMS Rules and any other requirements that may be imposed by the PO.
 
SUBJECT MATTER OF A SHORT SALE
 
IDSS may only be carried out in respect of approved securities (“Approved Securities”), which are securities that are declared by Bursa Malaysia to be Approved Securities pursuant to Rule 8.22(5) of the BMS Rules.
 
The list of Approved Securities for IDSS is identical to that of regulated short selling (“RSS”). The current list of Approved Securities is set out in PO’s Circular No. R/R7 of 2018 dated 18 May 2018 (effective 25 May 2018) and consists of 263 securities. The list will be updated twice a year in May and November.
 
CRITERIA TO BE SATISFIED TO EXECUTE IDSS
 
In order to execute IDSS, a seller must have, in addition to complying with the requirements specified by his PO –
 
(1)     entered into an agreement to borrow Eligible Securities (“SBL Agreement”) or to purchase Islamic Securities Selling and Buying – Negotiated Transaction (“ISSBNT”) Eligible Securities (“ISSBNT Agreement”) to settle all potential failed trades which may occur in the event that the IDSS is not closed off by the end of the relevant market day;
 
(2)     executed the prescribed risk disclosure statement; and
 
(3)     submitted a written declaration that he fully understands the requirements of the BMS Rules in relation to IDSS, and that he is not associated with the body corporate that issued or made available the Approved Securities in relation to which the short sale is to be entered.
 
The requirements in paragraphs (2) and (3) above do not apply to a seller who satisfies the criteria set out in Appendix 2 of Directive No. 8-003, which include, amongst others, licensed banks and investment banks, licensed fund managers, licensed closed-end funds, foreign fund managers and foreign financial institutions.
 
EXECUTION OF IDSS
 
IDSS may only be carried out by way of an On-Market Transaction, which is a match of a buy order to a sell order in Bursa Malaysia’s Automated Trading System. IDSS must not be executed through a Margin Account or by way of a Direct Business Transaction or On-Market Married Transaction.
 
All IDSS orders must be executed by a PO on the market day on which the order is placed. Any IDSS order which is unexecuted, in whole or in part, cannot be carried forward to the next market day.
 
IDSS is not permitted to be executed (a) within 21 days after a takeover announcement involving the Issuer of an Approved Securities; or (b) when the Approved Securities have been declared as Designated Securities under Rule 7.14 of the BMS Rules when expressly directed by Bursa Malaysia.
 
FAILURE TO CLOSE OFF A SELL POSITION
 
In the event the sell position is not closed off with a buy position at the end of the market day on which the IDSS is executed, the seller may perform any of the following -
 
(1)     borrow the securities under an SBL Agreement;
 
(2)     perform a manual buying in process or permit the transaction to be subject to auto buying in;
 
(3)     transfer the securities from another securities account, subject to the transfer rules; or
 
(4)     utilise his existing shares to cover the position.
 
The failure to close off a sell position with a buy position by the end of a market day is a breach of BMS Rules by the seller notwithstanding that he may have taken any of the actions described above. In such event, the Securities Commission Malaysia may take various actions against the seller, including imposing a penalty that is proportionate to the severity of the breach, but in any event not exceeding RM1 million, or reprimanding the seller.
 
SUSPENSION OF IDSS
 
IDSS may be suspended in the following circumstances –
 
(1)     if RSS is suspended upon any of the following thresholds being triggered -
 
(a)     if the quantity of the total short position of (i) an Approved Securities is 3% of the outstanding shares of the Issuer of the Approved Securities; or (ii) a class of Approved Securities is 3% of the quantity of the outstanding securities of that class of Approved Securities, on a market day;
 
(b)     the aggregated quantity of the total short position of an Approved Securities referred to in paragraph (1)(a) above is at 10% of the quantity of outstanding shares or securities of the Approved Securities;
 
(2)     if the last done price of the Approved Securities falls by more than RM0.15 (for Approved Securities with a Reference Price of less than RM1.00) or 15% (for Approved Securities with a Reference Price equal to or more than RM1.00) from the Reference Price.
 
IDSS will be suspended (i) for the remaining duration of the market day in the scenarios described in paragraphs (1)(a) or (2) above; or (ii) until the aggregated quantity falls below 10% of the quantity of outstanding shares or securities, which can only occur when there is redelivery of Eligible Securities under a SBL Agreement or of ISSBNT Eligible Securities under a ISSBNT Agreement in the scenario described in paragraph (1)(b) above.
 
Since its introduction until 30 June 2018, IDSS has been suspended on 42 occasions in respect of 28 Approved Securities, with Unisem being the first on 25 April 2018 and MyEG being suspended the most number of times on five occasions. In all instances, the suspension was due to the price of the Approved Securities falling by more than RM0.15 or 15% from their Reference Price. The suspensions on these grounds are reflective of the recent bearish sentiments on Asian bourses (including Bursa Malaysia) and do not suggest that there has been rampant short selling of Approved Securities. 
 
COMMENTS
 
The introduction of IDSS will open short selling to a wider group of investors and make the local bourse more interesting as it presents opportunities for making profits from trading securities even in a bearish market.
 
The safeguards put in place by Bursa Malaysia for IDSS, i.e. the requirement to have an SBL Agreement or ISSBNT Agreement to safeguard against a seller’s failure to close off an open position and the circuit-breakers that result in IDSS of an Approved Securities being suspended when specified thresholds are triggered, will prevent undue disruption to the stock market.
 
IDSS, with its safeguards, is to be welcomed as it adds greater depth and breadth to Malaysia’s capital market. Time will tell whether investors will become more sophisticated in their trading strategies by taking advantage of the availability of IDSS.