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  • Aug 2, 2014
  • Updated: 1:52am
Jake's View
PUBLISHED : Sunday, 04 August, 2013, 12:00am
UPDATED : Sunday, 04 August, 2013, 3:51am

SFC short-changing investors on placement share trades

Investors and brokers may face criminal prosecution for illegal short selling if they sell placing shares before completion of a placement, the Securities and Futures Commission warned, after recent SFC investigations showed some investors and brokers sold shares to which they had subscribed before the placement was finished.

South China Morning Post,
August 2

I have always thought short selling best defined by a jingle from the raw old days of the New York Stock Exchange:

Him what sells

What isn't his'n

Must buy it back

Or go to prison

They had reason to worry about the effects of shorting in New York a hundred years ago. In one celebrated incident, two rail barons secretly trying to acquire the same connecting railroad drove the share price to such ridiculous heights that the short position held by disbelieving speculators significantly exceeded the total number of shares in issue. The collapse that followed induced a financial crisis.

They are still easier about these things in New York than we are in Hong Kong.

To take a short position in New York, all you need is reasonable assurance of acquiring shares that you short. Here you must have your hands on the scrip by formal borrowing of it.

I lean to the New York way. You can always get the stock by bidding up for it and only the rare broker ever acts for a client who has no money to cover a short position that has gone against him.

Ensure that brokers are well capitalised and you have the possible problem solved.

But there is no denying that the short side of the market attracts ever more players here. As the chart shows, short transactions now account for about 10 per cent of total trading, up from virtually nothing in the mid-1990s, although I don't trust those mid-1990s figures. Much of it was just undeclared back then.

And undeclared shorting is what the SFC again invites if it insists that investors who buy shares in placements may not deal in them until the new shares are formally listed.

It happens anyway. If a New York market maker thinks you are a player at his level he will take your short and no regulatory agency in Hong Kong will ever be the wiser.

The rich have the privilege. The poor do not.

The SFC's reasoning is that placements are conditional and do not always go ahead as expected. The stock exchange's listing committee may refuse the listing, for instance.

Perhaps it may, but sales of placement shares are not quite the same as ordinary shorting of the market. With placements, the seller is already committed to buying the stock before he sells and he faces a period in which there will otherwise be no dealing in the stock and no opportunity to get out.

Surely, the people at the SFC should be able to appreciate this and work towards some mechanism that will allow dealings in placement shares instead of summarily ruling that such dealings constitute a "naked short" and a criminal offence. Why this constant brutality towards the market?

It could be simply done - all placement shares allotted but not yet formally listed to be traded on a special board, with trades registered but no money changing hands or, at least, no payments formally recognised, until listing.

If the listing is refused, these trades all vanish at no cost to anyone. If the listing is approved, all the trades are registered as the first ones of the listing.

But, no, what the SFC gives the market instead is a point-blank refusal and its usual threatening talk of criminal penalties.

Someone needs to rein these people in.

jake.vanderkamp@scmp.com

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