BROKERS and investors allegedly involved in short-selling shares in Cheerful Holdings and All Pantronic face prosecution following an investigation into breaches of the regulations by the Hong Kong Stock Exchange. Exchange director Paul Phenix said: ''We have been looking at the trading in the new listings All Pantronic and Cheerful and have been pursuing our investigation here against a number of individuals for short-selling with prosecution likely.'' According to individuals linked to the affair, files are understood to have been prepared on brokers and investors allegedly involved in short-selling in breach of the regulations. Up to 10 people could be liable for prosecution, including brokers and investors. It is understood the exchange is intent on prosecuting the brokers while the files on the investors are due to be passed on to the Securities and Futures Commission for consideration with a view to prosecution instituted by the commission. On receiving the files, it is understood the SFC will begin its own probe by calling in for interviews the parties under investigation and witnesses. While the number of brokers and the amount of money involved is not large, according brokers, it will probably be the biggest series of prosecutions - should they go ahead - since the International Tak Cheung share and warrant trading scandal in 1990. Mr Phenix said he could not comment in detail about the investigations. He said individual trading patterns had been closely monitored in the new listings and individuals had been isolated for breaches of short-selling regulations. ''The new AMS [automated share trading] facility has made such monitoring a lot easier and the market has become more transparent in trading terms for us,'' said Mr Phenix. Trading in All Pantronic, listed on April 28 in an $87 million offer, and Cheerful Holdings, listed on April 27 in a $64 million offer, became the subject of exchange monitoring and notices very early on in trading. Investors were warned in notices of the abnormal trading in a bid to avoid the potential for a short squeeze in trading from developing. In the past, the exchange has warned investors of abnormal trading in the listing of Pak Fah Yeow. A short squeeze is when an investor or group of investors sell stock they do not have in a company with the expectation the share price will drop. This allows the sellers to pick up stock at a lower price, which they can use to settle the original sales, making a profit on the differential. Since the ITC share and warrant trading scandal, the exchange has developed a new listing monitoring and surveillance system that covers quite a long period in the life of a new listing once its shares begin to trade. In the ITC trading scandal, share trading in the construction firm was suspended in September and October 1990. Despite the suspension on resumption of trading, the warrant price reached a level of three times that of the actual share price in one of the biggest short squeezes seen on the exchange. After rigorous investigation and a series of special settlement sessions, after trading hours, it is estimated about $200 million was run up in trading losses. A brokerage, called BSC, collapsed and in May 1991 around 208 individuals, including brokers and investors, were convicted of offences linked to the ITC trading affair. Short-selling has been made practical in the wake of the 1994 Budget statement. According to brokers, trading witnessed in the All Pantronic and Cheerful listings focused on a small number of participants which appeared to undertake regular buy and sell activity on a repetitive basis through the period under investigation. In some cases the actual movement in the price of stock involved was only a factor of 10 cents through some of the trading patterns.