Friday, 14 November 2008

SGX to build up penalties for ‘naked’ short-selling

Traders involved in the ‘naked’ short-selling of shares will find the practice increasingly painful financially.

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Guanyu said...

SGX to build up penalties for ‘naked’ short-selling

By Goh Eng Yeow
14 November 2008

Traders involved in the ‘naked’ short-selling of shares will find the practice increasingly painful financially.

The Singapore Exchange wants to progressively build up the penalties it imposes on these errant traders for persistent non-delivery of shares.

In naked short-selling, a trader sells a stock he does not own, or has not borrowed, in the hope that the price will fall, allowing him to pocket the difference.

SGX said yesterday that these ‘failed’ trades ‘threaten the orderliness of the securities market’.

As the short-seller does not have any shares to deliver to the buyer on the settlement date, SGX has created a special ‘buying-in’ market so the seller can settle the trade.

It outlined in a consultation paper yesterday how it intended to deter naked short-selling with its proposed ‘permanent penalty framework’.

‘To reinforce the gravity of how failed share delivery threatens market orderliness, SGX proposes for the penalties to be cumulative in nature,’ it said.

SGX wants to impose an initial fine of $1,000 or more for each failed trade. This will be paid by errant traders who fail to deliver the shares on the settlement date.

It also wants to deal with situations in which a brokerage fails to cover the short position after shares are supposed to be bought from the buying-in market to cover the shortfall.

‘The penalty amount will progressively build up for persistent non-delivery of securities,’ SGX said.

It wants to raise the penalty imposed on brokerages for procurement of the shares from $100 a day now to $5,000.

SGX also pointed out that honest mistake would not be penalised.

The penalty it imposes for naked short-selling must be paid within five business days, unless an appeal is lodged.

Since it imposed the penalty as an interim measure in September, naked short-selling has almost died out.

Yesterday, shares in 24 counters were bought by SGX on the ‘buying-in’ market to cover short positions. Shares worth $385,000 from 24 counters were ‘bought in’ on Wednesday.