In May, the Securities and Exchange Commission (“SEC”) granted approval to the Philippine Stock Exchange (“PSE”) for the introduction of short-selling, which has now officially launched earlier today.

But what exactly is short-selling? What are its implications? What does it mean for the economy?

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Short-selling, or shorting, is a strategy for individuals to profit when they believe a particular stock’s price or financial security is going to fall. It is basically a four-step process.

Photo from The Balance

First, the investor would borrow some shares from a broker or another investor. Next, they sell these borrowed shares at the current market price. Then, they buy back the same number of shares at a lower price, which they anticipated would happen before they entered the short position. Finally, they return these borrowed shares to the lender.

The profit they make is the difference between the price at which they initially sold the shares and the lower price at which they repurchased them.

Now, what does the short-selling offer to investors? It is simple: risk management and price discovery.

Short-selling serves various purposes, one of which is providing investors with a valuable risk management tool to safeguard their positions by hedging against assets or offsetting potential losses during market downturns.

Additionally, it acts as a valuable mechanism for investors to express their contrarian views regarding a stock or any financial securities’ present valuation. This in turn enhances the accuracy of stock prices. From this, it can also avert speculative bubbles.

So, what are the trade-offs and how does it affect the Philippine economy?

Introducing short-selling into the Philippine public markets may boost investor confidence.

Such an introduction signifies the market’s maturation, which boosts its appeal to both domestic and international investors. This is because it enhances transparency, operational efficiency, and risk management through price discovery.

Shorting provides investors with a platform to express their contrarian views on stock valuations, fostering a more accurate assessment of stock prices.

This enhanced accuracy in valuations serves as a crucial mechanism for averting speculative bubbles. Furthermore, it equips investors with a valuable risk management tool, particularly vital during phases of market volatility.

However, in less liquid markets, such as the Philippines, short-selling may amplify market volatility, leading to less predictable price movements that could concern investors.

Moreover, there is a risk of market manipulation associated with short-selling, as some may exploit it to artificially depress stock prices, potentially harming companies and fellow investors.

The amplification of volatility concerns may be why there is a restriction of short-selling to only the 30 most heavily traded stocks, which are the most liquid tickers. In addition, in an effort to prevent market abuse, short-selling will be limited to 10% of a company’s outstanding shares.

Nevertheless, the introduction of short-selling in the Philippine public markets signals a maturing of these markets, potentially paving the way for increased investment opportunities. As more capital flows into companies, they can allocate these funds toward research and development, fostering long-term economic growth.

The restriction, which allows shorting on only 30 select companies and imposes limits on the number of outstanding shares that can be shorted, serves as a protective measure to mitigate financial risks. As the market continues to evolve, these restrictions on short-selling may be reevaluated and refined in response to market developments.

About the Philippine Markets Newsletter
“The Monday Macro Report”

When just about anyone can post just about anything online, it gets increasingly difficult for an individual investor to sift through the plethora of information available.

Investors need a tool that will help them cut through any biased or misleading information and dive straight into reliable and useful data.

Every Monday, we publish an interesting chart on the Philippine economy and stock market. We highlight data that investors would normally look at, but through the lens of Uniform Accounting, a powerful tool that gets investors closer to understanding the economic reality of firms.

Understanding what kind of market we are in, what leading indicators we should be looking at, and what market expectations are will make investing a less monumental task than finding a needle in a haystack.

Hope you’ve found this week’s macro chart interesting and insightful.

Stay tuned for next week’s Monday Macro report!

Regards,

Angelica Lim
Research Director
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