Short selling to start on Oct. 23

The Philippine Stock Exchange, Inc. (PSE) will launch the short selling of securities on Oct. 23 in a bid to bolster trading in the domestic market.

“PSE is set to launch short selling within the month. More specifically, we are targeting Oct. 23 given that all regulatory approvals were received for this initiative,” PSE President and Chief Executive Officer Ramon S. Monzon said during a forum organized by the local market operator in Taguig City on Wednesday.

His statement comes after the PSE announced on Oct. 2 that short-selling guidelines are to take effect immediately following the regulatory approval of provisions relating to securities borrowing and lending (SBL). Short selling could only function if an SBL program is in place.

The PSE describes short selling as a “trading strategy” that involves the selling of a borrowed security with the intention of buying it back later at a lower price. Short selling allows investors to hedge against the downside risk of an investment.

Eligible securities for short selling are all PSE index, PSE MidCap, and PSE Dividend Yield constituent companies and exchange-traded funds.

The trading strategy is practiced in Southeast Asian countries such as Singapore, Hong Kong, Malaysia, Thailand, and Indonesia.

Short-selling guidelines were approved by the PSE in 2018 but were not implemented because of pending approvals from the Securities and Exchange Commission and the Bureau of Internal Revenue. The market operator is banking on short selling to attract foreign investors and drive market activity.

PNB Securities, Inc. President Manuel Antonio G. Lisbona told BusinessWorld via mobile phone that the upcoming launch of short selling gives another option for market participants to earn.

“By allowing short selling, the PSE provides a way for stock market participants to make money in a bear market,” he said.

However, Mr. Lisbona cautioned investors to first be familiar with short-selling rules, “particularly the uptick rule, which means that a short sale order cannot be executed at the ‘bid’ but posted at the ‘ask’ price.”

“More importantly, the potential loss on short selling is theoretically infinite, therefore there should be good risk management practices in place like stop-loss orders,” he added.

April Lynn Lee-Tan, COL Financial Group, Inc. chief equity strategist, said via mobile phone that short selling could boost the market’s value turnover.

“The addition of new products should help improve value turnover, although not immediately. At least investors have more options to capitalize on opportunities, depending on market conditions,” she said.

China Bank Capital Corp. Managing Director Juan Paolo E. Colet said the launch of short selling is a “positive development” for the domestic stock market and will boost market activity and liquidity.

“I expect this product to attract more investors, including foreign long/short funds, and expand the investment strategies available to market participants,” Mr. Colet told BusinessWorld via mobile phone.

“Retail investors should be particularly careful as they can suffer potentially significant losses if they do not properly manage their short sales,” he added.

Rizal Commercial Banking Corp. Chief Economist Michael L. Ricafort said the entry of short selling would align the country’s stock market trading standards with developed countries.

“This gives the investing public the flexibility to sell shares of stock from borrowed stocks, somewhat aligning with the stock market trading standards in developed countries, thereby would also hope to attract more foreign investors in the local stock market,” Mr. Ricafort said.

“This is also part of the measures to further develop the local capital markets, as aligned with global best practices that help the local market mature further,” he added.

Meanwhile, Mr. Monzon identified PSE initiatives to improve the local market such as the proposed changes to the board lot amendment, which would allow for more accessible and affordable stock investing for more retail investors. It is planned for implementation by the first quarter of next year.

“For financial inclusion, we have recently proposed a rule revision that will change the board lot amendment to enable retail investors to invest as low as P100 in the stock market,” Mr. Monzon said.

“We’re amending our rules and changing this board lots to accommodate the expected influx of retail investors from GCash,” he added.

The PSE has previously partnered with electronic wallet GCash and AB Capital to launch GStocks, which is an in-app platform that allows users to invest in Philippine equities. GStocks is set for a nationwide launch on Oct. 19.

Mr. Monzon added that the PSE is eyeing cross-border trading both for Philippine securities and shares of overseas listed companies via the depositary receipt (DR). The initiative’s target implementation date is in the fourth quarter of 2024.

“These DRs will enable local investors to further diversify their portfolios. The DR will have underlying shares of foreign publicly listed companies at a 1:1 ratio,” Mr. Monzon said.

“This initiative is also expected to generate additional liquidity in our market as issuers from other exchanges create DRs with Philippine-listed companies as the underlying asset,” he added.

Mr. Monzon also said that the PSE is planning to introduce derivatives. The target implementation is by the second quarter of 2025.

“A derivative is a financial instrument [whose] value is based on the price movement of an underlying asset that can be used by investors to manage risk in their portfolios,” Mr. Monzon said.

He said investors could use derivatives to hedge against the risk of market fluctuations “and enhance transparency and liquidity in the market by providing market-based pricing information.”

Mr. Monzon also disclosed that volume-weighted average price (VWAP) and algorithmic trading are set to be implemented by the first quarter of next year.

VWAP trading uses volume-weighted average price in the execution of transactions through the PSE trading facility while algorithmic trading uses electronic trading platforms for entering orders to the PSE. — By Revin Mikhael D. Ochave, Reporter