Thursday, July 09, 2009

Short selling shares at the NSE

Since the NSE is afraid of introducing market-makers to provide a bit more liquidity into the bourse, and brokers are broke, why not allow shorting of shares formally?

I figure looking at some of the past trade patterns that this already happens anyway. Kichini chini, Kenya-style.

Briefly, short selling works like this. I go to JM and borrow 1m HFCK shares paying him Ksh1 per share as borrowing fee. We agree I'll return them in 4 weeks time. I then sell them immediately say at Ksh17.50 per share. I sit back having (a) surmised that my trade won't go unnoticed or (b) had some inkling that HFCK was due release some nasty news. And buy back the shares at Ksh15. I give JM his shares back. JM makes a Ksh1m and I make something similar.

It would be a winner for all.

  1. Brokers-would get their usual commission per transaction.
  2. Long-term investors get to earn something while awaiting their horizon to mature.
  3. Bourse has increased activity and interest.
  4. Short-term investors get interested in the market.
  5. Even lawyers get a bit of the crust in creating and signing off contracts although in most occasions the broker can facilitate.

So where is the problem? Are Kenyans only ever to be interested in the NSE when we have an IPO or a bull run?


thensetechnician said...

i must agree with you on this, they need to balance the turf and give investors and traders the opportunity to profit from the inevitable downward movement in the price of a stock.
oh how i long for the day we will see a derivatives exchange in Kenya.

Village Analyst said...

Maybe, just maybe Uhuru's plan to suspend NSSF from trading will have'm get more creative and venture into short sale aggrements with other parties...then again, that's quite a long shot!

coldtusker said...

Waiting to hear from you...

coldtusker said...

BUT... in the event the price rises OR there is a short squeeze, then what?

How do you cover the 'seller'?

In the USA/UK, the broker has a margin & you have to fulfil that (cash deposit)... Would you deposit an extra 50% just in case?

kainvestor said...

Sounds nice, but would be difficult to implement taking into consideration the kind of brokers we have at the NSE. then again this is what brokers do with our shares and make the difference. they won't allow every investor to have access to this kind of deals.

Village Analyst said...

The first step is for a party/parties with significant holdings to avail their securities for such trading. The rest is just formalities as to how to go about the transaction.
In this case NSSF has enough clout to do that and (as a gov't body) to pile on the pressure on market players to clean up the current operations. Given the trading freeze, its in their interests to do both.

Maishinski said...

You need laws that work.

With current impunity, legalizing shorting will be giving rogue brokers the license to go ROGUE.

Imagine the chaos...