So can people do short-selling or not?

Great question. A BusinessWorld article on Monday of last week titled, “PSE: Short selling progress hinges on market recovery” [link], started a great deal of discussion online, and prompted a flurry of emails and DMs from traders and investors all asking variants of the same question: Can we short-sell yet? Let’s talk about it. 

> First, the article: BusinessWorld started by noting the “slow progress” of the PSE’s “short selling product”, and quoted PSE President Ramon Monzon as saying that he’s “not worried”, adding that “as long as the short selling capability is there, that is the most important thing.” Mr. Monzon went on to say that short selling was “really to target the foreign investors so that when the emerging market or the Philippine economy loses favor, instead of selling out, they can hedge.” As for why there have been zero short trades since the product was launched three months ago, Mr. Monzon said, “I don’t expect short selling to take off in a big way right away because the market is down. Brokers also have to adapt their back office... Hopefully, when the market is up, everything is in place.” 

> What is the state of short-selling? There have been zero short-selling transactions. You can check and track this yourself by going to the Market Reports section of the PSE website and looking at the Daily Short Sell Report. 

> But I thought the PSE “launched” short-selling in November? I think that was the PSE’s signal to the market that it had done what was needed of it to make short-selling possible. It’s like the PSE finished the construction of the Short Selling Bridge, but nobody has a car that’s been registered and there are no licensed drivers. 

> Is it even possible to short-sell? No. In theory, the system to allow short selling has been built, but there are still important agreements between some of the parties involved that don’t seem to have been signed/completed yet. From my understanding, the completion of these agreements is not under the control of the PSE. When the PSE announced that shorting was possible in November, it was probably talking about the completion of the framework to allow short-selling to happen, not that all parties involved had completed their agreements and due diligence to take part on that system. 

> Is it only the foreigners who can short? No. Nobody can short – yet. There is no super-secret backchannel available only to foreign traders.

> When will retail traders be able to short? Nobody knows for sure. The PSE’s work was only one part of the process, and they likely aren’t in a position to force adoption of short-selling upon the confederated group of brokers. Like when REIT trading was introduced a few years ago, the rollout of short-selling with our brokers will be on a broker-by-broker basis. 

> What can I do? If you want to offer your shares to the lending pool or sell stocks short, regardless of your account size, the most important thing for you to do is contact your broker and express your interest in participation. Perhaps your broker has construed your silence to be disinterest. If you see that some other brokers have started to offer short-selling and you don’t get the impression that yours will, take the steps to change brokers. It’s really easy to do. You didn’t get married to your broker!

 

MB bottom-line: It looks like we're going to have to wait for a few major milestones and dominoes to fall before we get any short-selling action on the PSE, and then we’ll just have to wait to see if any of that action trickles down to us at the retail level. It feels like how I imagine it must have gone for the first humans who found out that it’s ok to eat oysters: everyone gathered around the opened shell, looking at the gnarly glob of sea snot glistening in the sun, not wanting to be the first one to take a taste. What if it tastes how it looks? What if it’s poisonous? That’s the feeling that I have about the short-selling situation. Once someone eats the oyster and doesn’t die, others will probably become more willing to partake in the effort needed to get connected. So, to get back to the article, I don’t think it’s accurate to say that there’s not been any short interest because our market is down. Whatever is holding shorting back is at the administrative level. It’s with the brokers and other stakeholders in the system. It’s more that “back office” comment than it is anything to do with the PSEi or where it’s at. I also don’t necessarily agree that the only important thing is that the “short selling capability is there”, as there’s a lot more work that needs to be done, and that work seems to be just as important as the build-out of the system itself. All that said, though, all we can do is wait for someone to eat the oyster and get the party started. Keep our fingers crossed that nobody dies and that the process becomes easy enough that even retail-facing brokerages will feel like the cost-benefit analysis has tipped in their favor.

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