HONG KONG must have active short selling and trading of options on stocks or risk losing even more business to other exchanges, a stock exchange official has warned. Executive director Paul Phenix told the Pan-Asia Securities Lending Congress yesterday that restrictive regulations had stalled stock-lending activity in Hong Kong and moved the business to offshore markets. He said there were some estimates that the total amount of open positions on Hong Kong stocks had reached US$3 billion, creating a serious threat to the market's short selling and options projects. ''One of the reasons so much of our stock is traded in London is that it is a financial supermarket,'' Mr Phenix said. ''The biggest plus we have is liquidity but this is improving in London. On good days they are doing 18 per cent of what we do on the Hong Kong stocks listed in London,'' he said. This competitive environment has created a sense of urgency for the stock exchange to launch short selling as soon as possible. Mr Phenix said short selling would be available within the new automatic trading system by mid-December or early January. ''We will start short selling regardless of what happens to stock lending [rules]. We have to prove a point,'' he said, adding that a provisional list of 23 stocks had been selected for short selling. Short selling is not illegal in Hong Kong under the present rules. However, Mr Phenix said there had been only 125 deals over the past 18 months due to a regulatory obstacles. Among the biggest stumbling blocks was the 14-day limit on stock lending. Mr Phenix said a number of issues had to be resolved before short selling could start, including amendments to the Stamp Duty Ordinance to allow stock lending for reasons other than settlement. Securities and Futures Commission assistant director Patrick Conroy said one proposal was to change the definition of an approved borrower from a criterion for tax exemption with the concept of genuine stock borrowing and lending transactions to encourage more activity. He said the SFC had also advocated the extension of stock lending to 12 months from 14 days to make stock borrowing commercially viable for both lenders and borrowers. The SFC has also proposed relaxing the ''sole purpose'' test so common stock borrowing and lending transactions such as multiple lendings would be entitled to stamp duty exemption. The stock exchange and SFC have made submissions to the Government and, if the amendments are approved, the changes will be sent to Legislative Council. Mr Conroy said once short selling was revitalised, there would be other opportunities for market developments. This could see the establishment of a centralised stock borrowing and lending system whereby stocks available for lending would be pooled and borrowers could have equal access to the system for stock borrowing. Mr Phenix said short selling could increase daily turnover by 10 to 12 per cent, although in a trading environment like that experienced over the past couple of days this could climb as investors took views counter to the market's direction. In addition to increased revenue, he said the development of a short selling industry would see stock lending operations moved to Hong Kong, involving an estimated 500 people. The introduction of short selling and options on stocks, he said, was part of a concerted effort by the exchange to create a financial supermarket for China and the Far East.