Disclosure rules leave HK short on key curve
A few years ago, a trader for an investment bank was quoted in a London newspaper offering the most brazen of excuses for insider trading.
'Inside information?' he was quoted as saying. 'No way. We were just playing our position on the knowledge curve.' Welcome to one of Hong Kong's favourite curves.
The rules covering short selling on the stock exchange are explicit. Only designated securities may be sold short and any member of the exchange selling short either for his own account or on behalf of a client has an obligation to ensure when placing a short sales order that the short-sold security is available for settlement.
The rules also state that a member must indicate every short-selling transaction when inputting the short-sell order, state that it is a short sell on the contract note and maintain an up-to-date ledger for the authorities.
Ask your stockbroker, and he'll tell you that the rules apply only to short sales he has made himself. You can confidently count on the fingers of one hand the number of brokers who recognise that the rules say '. . . or on behalf of a client . . '. They haven't read the rules.
Amputate a few fingers and you'll still be able to count the number of brokers who ask their clients whether a sell order represents a short sale. They don't dare. Clients treat it as effrontery.
In its Financial Markets Review published in April, the Hong Kong Monetary Authority (HKMA) admitted: 'The SEHK [Stock Exchange of Hong Kong] understands from market practitioners that unreported short selling of Hong Kong stocks based on offshore borrowing exists both in Hong Kong or overseas. The extent of such practice is, however, unknown.' Yet, in the preceding paragraph, the review states 'the aggregate value of short-selling transactions remained insignificant as compared to the total trading in the stock market.' The HKMA came to this conclusion because it took the reported short position as being all there was, although admitting on the same page of the review that it was very likely not.