Critics short-sighted about short selling

PUBLISHED : Wednesday, 05 October, 2011, 12:00am
UPDATED : Wednesday, 05 October, 2011, 12:00am


No one likes short-sellers. These are people who profit when stock markets crash, leaving big holes in your investment portfolio. Since August, governments in South Korea, France, Spain, Italy and Belgium have moved to restrict or ban shorting.

Now, seven brokerage bodies in Hong Kong have lobbied the government to follow the overseas examples. The Hang Seng benchmark has dropped more than 25 per cent in two months. The brokers argue short selling is contributing to the fall.

Officials have no immediate reaction, but their thinking appears to be that the city already has some of the world's most stringent rules on shorting, so there is no reason to ban the practice.

If that is the case, they are right. A ban would only have a short-term effect. When markets nosedive, nothing can reverse them until they find their bottoms. Shorting simply hastens the fall, but does not cause it.

Markets can only function properly when people are allowed take a bearish view and act on it. Generally, shorting successfully requires far more skill, knowledge and research than going long. It therefore requires far more resources than many small brokerages can afford. The seven bodies represent the smaller brokerages. Unlike the big players, they don't have the technical or financial resources to develop and sell hedging services such as shorting and put options. Their vested interest is obvious.

A more relevant question is why shares held in MPF accounts are allowed to be lent to short-sellers. It's not in your interest to have your trustees lending your shares to people who want to short against them. Unlike banning shorting in general, there is a strong case for banning such lending.