Philippine Stock Exchange to introduce short selling

Investors in the Philippine Stock Exchange (PSE) are set to have a wider range of products and trading options at their disposal, with the exchange announcing that short selling will be made available during the third quarter of this year.

Philippines Capital Markets

As set out by the PSE last month, short selling will be restricted to exchange-traded funds and the 30 stocks listed on the main PSE index (PSEi), with the permitted trading ceiling set at 10% of the outstanding shares of any eligible security.

The practice of shorting enables traders to sell borrowed stocks at the prevailing market price – an operation carried out in the belief that the asset’s future value will decrease, allowing the shares to be bought back at a cheaper price and returned to the lender at a profit, if successful. 

While the Securities and Exchange Commission gave approval to introduce short selling in late June, the PSE is not permitting the practice to take place until October. This is to ensure all necessary safeguards have been put in place, including briefings, information dissemination initiatives and system customisations.

Efforts to boost trading gain traction

The introduction of short selling is part of the PSE’s aim to improve liquidity in the market and broaden its trading base, following the introduction of dollar-denominated securities in late 2016, with the first such listing taking place in April last year. Three companies took this route in 2017, with their issuances raising a combined $370m.

Moves to expand the range of available instruments have been a long time coming: the exchange’s management announced as far back as 2008 that it would be developing a new derivatives market, while the PSE issued a draft set of guidelines on short selling in 2014, and another set of draft regulations seven years before that.

Nonetheless, according to the exchange’s president and CEO, Ramon Monzon, the steady rollout of new products could have a positive impact.

“Being behind its peers, the PSE does not have to reinvent the wheel in the new products it will soon be launching, which include securities lending, short selling, derivatives, real estate investment trusts and others,” he told OBG. “We have the benefit of selecting best practices to suit our market while avoiding the pitfalls that others have encountered.”

Stock exchange rebounds, stock offerings provide boost for capital  

The announcement of a new trading mechanism follows a mixed year to date. The bourse registered sharp decreases in market capitalisation following a record-breaking start to the year, but also hit new highs in terms of capital raised.

The PSEi fell nearly 24% from an all-time high of 9078 points at the end of January to 6924 points on June 22, before rebounding to 7879 in early August.

According to stakeholders, much of the pressure on the index came from concerns over fallout from the escalating trade war between the US and China – both major trading partners of the Philippines – as well as the weakening of the local currency and rising inflation.

Falling values have, however, been offset by record-breaking capital-raising activity: between January and June there was a 40.5% year-on-year increase in funding raised by listed companies, which hit P150.1bn ($2.8bn). This was achieved through a combination of rights offerings, private placements and an initial public offering.

The results exceeded PSE forecasts, with the outcome for the first six months of this year representing 75% of the year-end capital-raising target. According to Monzon, this was indicative of the fact that listed firms and investors had shaken off concerns over market volatility, and were instead looking to the more solid metrics of the broader economy, which is forecast to expand at between 6.7% and 6.8% this year, according to estimates from the IMF and the Asian Development Bank.

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