Article: “Short Selling” and Stock Market Movements

HoonSmart.com >> Article “Short Selling” and Stock Market Movements. Know the differences between a “short sale” and a naked short sale.

Securities Analysis Department of Kingsford Securities Company Mr. Abichai Ravmanachai wrote an article on short selling and stock market movements.

When it comes to trending issues that underperform the stock market, one of them is the issue of short selling and naked short selling transactions. Therefore, Kingsford Analytics Department therefore, we have taken this opportunity to provide information to investors and present our views on the above matter.

What is a short sale?

A short sale is a transaction to sell a stock. The seller borrowed the shares from a securities firm. or stock lending institution, short sellers must place a security deposit (margin) with the stock lending institution. Short selling involves borrowing stock to sell in the first place (closing the short), including paying a short selling fee on a daily basis until the short seller returns the borrowed stock.

What is a naked short sale?

A naked short sale is a short sale transaction in which the seller neither owns nor borrows the stock. But you can send sales orders.

Will Short Selling and Naked Short Selling Affect the Market Decline?

In practice, do short selling transactions cause a market crash? Overall, this is still a complex issue. There are many variables such as fundamental conditions of companies listed in the market at the time, liquidity resulting from short sale transactions.

An example case study on short sale transactions is the case study by Beber and Pagano entitled “Short Sale Bans Around the World: Evidence from the 2007-09 Crisis”, which is a study of bans on short sale transactions in several countries. subcrisis.

The conclusion is that a ban on short selling transactions results in a significant reduction in market liquidity. And there is no evidence that a ban on short selling has a positive effect on most markets in more than 30 countries, except for a positive relationship in the US stock market.

According to theory in our view, short selling is said to create leg power. and is one of the constraints that prevent the price from being in the very high zone (high price) but has a negative impact on the market. It may not be much from a volume short, which is limited by the number of shares the stock seller can borrow.

However, a bare short sale is much worse. Because it creates exaggerated selling pressure from the supply of non-existent stock. As a result, the stock price is under selling pressure. Less than usual. Not surprisingly, naked short selling is illegal in most countries. Short selling still has advantages, but naked short selling has disadvantages. Hence illegal

So are there still naked short sales?

Although naked short selling is illegal in most countries, breaking the law or observing the law is still often seen in foreign markets.

1. For South Korea, naked short selling transactions were detected in 2023.
2. As for GameSpot shares in the United States, the number of shares is reduced by 140% in 2021.
3. The Case for US Dendreon Stocks in 2020

An example is the recent ban on short sale transactions
If we talk about the recent ban on short selling transactions, we should talk about the South Korean stock market, which has banned short selling several times, and most recently on November 5, 2023 (until the end of June) Y. .67)

A timeline of South Korea's ban on short selling transactions
13 March 2020 Ban on short selling for 6 months (Covid-19)
On 27 August 2020 the ban was extended for 6 months.
09 December 2020 Review related laws/increase penalties
03 February 2021 ban will continue till 02 May 2021.
03 May 2021 Short selling will only apply to stocks in KOSPI-200 and KOSDAQ-150.
Prohibit short selling from November 06, 2023 to June 30, 2024

Affected by the latest ban, the first trading day of 1 day after the ban was announced was detected. (Announced on Sunday 05 November 2023, first trading day on Monday 06 November 2023) KOSPI index corrected +6%.

Period 03 November – 31 December 2023 +12% Considering the data set of 38 bars before and after the barrier, the trading volume from 6 November 2023 – 28 December 2023 is low. 6 Sep 2023 – to 3 November 2023, approximately -7%.

Short selling and the Thai stock market

The ratio of value of short selling to short selling in Thai stock market is as follows.

Duration % Short Sale Value SET Trade Value Compared to SET Movement
January 2024 12.00% -3.63%
Year 66 10.59% -15.15%
Year 65 9.67% +0.67%
Year 64 6.61% +14.37%
Year 63 3.00% -8.26%
Year 62 5.15% +1.02%

If we consider only the increasing factor of short sale, such a conclusion cannot be made unless other factors like profitability of listed companies, foreign fund flows are considered, which has a negative effect on the direction of SET movement.

In short

For short sale transactions, although this is still debatable, is this more positive than negative? But note that many countries market after a naked short sale transaction takes place, and the short sale ban is used as a tool in cases where the market is very volatile, such as the subprime crisis or South Korea's short sale ban in 2023.

In our view, short selling transactions are a good market tool during normal times. It creates price equilibrium and helps in liquidity.

But, inevitably, the question that arises today is whether or not the market is normal at this point in time. And extraordinary cases Will the issuance of measures restricting short selling transactions (prohibition/or specific prohibition) have a negative impact on cash flow?

Article written by Abichai Ravmanachai
Securities Analysis Department, Kingsford Securities Public Company Limited