Short selling slumps with trade halted in key stocks
Official moves to clamp down on short sales intensified yesterday as the stock exchange suspended short trades in HSBC Holdings, China Telecom (Hong Kong) and Hongkong Telecom.
The unprecendented action, which undermines investors' ability to short sell almost half the Hang Seng Index, came as clearing authorities reported a backlog of unsettled trades in the wake of last week's extensive official intervention.
'The exchange considered it should take appropriate measures to prevent any systemic failures and to avoid aggravation of the settlement backlog,' a spokesman said, adding that the ban would remain in effect until further notice.
'Under these circumstances, in order to manage the settlement risk and to maintain a fair and orderly market, and not to risk further worsening the settlement cycle, the exchange has temporarily suspended the three stocks from short selling.' As authorities toughened their stance, the Hang Seng Index surged on a rush of short covering, brokers said.
The lead index ended 4.15 per cent firmer at 7,355.67 points, with gains also underpinned by Wall Street's Tuesday rebound.
HSBC Holdings accounts for 28.29 per cent of the Hang Seng Index's weighting, while Hongkong Telecom represents 11.09 per cent and China Telecom 8.45 per cent.
In a separate move after the market closed, the exchange said it was reintroducing the tick rule, which requires that short sales be made no lower than the last asking price.
The decision, which is subject to approval by the Securities and Futures Commission, had been expected.
Vickers Ballas Securities sales director Antony Mak Siu-leung said: '[The ban is] quite a surprise, no one expected the move. They haven't said when it's going to stop.
'People can't arbitrage - you can't take advantage of the difference between the cash and futures. It was a one-two punch.' On Monday, Hong Kong Securities Clearing said it was tightening rules that require all trades to be settled within two days, known as the T+2 ruling.
The decision left many brokers scrambling to borrow stock to cover short sales in a market that has seen the supply of available scrip shrink dramatically.
A stock exchange statement said the body 'reminded market participants that naked short selling is illegal and members involved in the short selling of suspended short selling stocks will be subject to disciplinary action'.
Naked short sales involve executing a trade before a brokerage, or its client, has borrowed the stock. It appears that many of those caught out by Hongkong Clearing made such sales.
'As of September 1, Hongkong Clearing reported that 30 million HSBC Holdings, 100 million Hongkong Telecom and 62 million China Telecom (Hong Kong) shares failed to meet the T+2 settlement requirements, mainly due to heavy selling on August 27 and 28,' the exchange said.
'As of September 1, the total value of these unsettled transactions amounted to $7.5 billion.' Despite the exchange's tough language - which is in keeping with the harsher tone adopted by market authorities in recent days - brokers said that it remained possible to short sell offshore, if you could find scrip.
'You can arbitrage but you have to be careful. You short sell offshore,' one head of trading said.
The total volume of short sales slumped to $31.39 million yesterday compared with Tuesday's $401.5 million, and the $476.8 million daily average over the past three months.
