Short Selling stocks in the PSE (Proposed Rules)

James Ryan Jonas

What is “Short Selling”?

Short selling is the act of selling a stock that is not owned by the investor, usually with an expectation that its price will drop, ultimately to make a profit if and when the stock price actually declines.

An example of how a short sale is done and how profits (and also losses) are made are explained in our article Short Selling in the PSE to be allowed soon?

Short selling may soon be allowed, likely by 2018, as mentioned by PSE President Ramon Monzon during a Bloomberg TV interview.

Back in 2014, the Philippine Stock Exchange (PSE) has released preliminary rules and has asked the public to comment on their proposed Short Selling Guidelines. Here’s a summary of the proposed PSE Guidelines for Short Selling Transactions in the Philippines back in 2014.

UPDATE (June 2018): The PSE announced that its proposed Short Selling rules have been approved by the Securities and Exchange Commission (SEC) and that Short Selling will soon be allowed in the latter part of 2018. Read more here: New PSE Short Selling Rules 2018 (Official Rules)

I. Eligible Securities

a. A Security may be considered eligible for short selling (“Eligible Security”) if it meets the following criteria:

  1. Market capitalization — at least ten billion pesos (PHP 10 billion)
  2. Liquidity — must have been traded 95% in the regular board six months prior to the month of publication of the list of eligible securities; and
  3. Compliance with prescribed ratio of short interest to outstanding shares under paragraph D below.

The “Short Interest” refers to the cumulative number of shares of a security sold short by the Trading Participant, and adjusted for any corporate actions as may be applicable, provided, that such short interest have not yet been closed out.

Provided that preferred shares shall not be eligible for short selling, notwithstanding compliance with the foregoing criteria.

b. Exchange Traded Funds (ETF) and their underlying securities traded in the Exchange shall be considered as Eligible Securities.

c. All constituent stocks of the PSEi are deemed Eligible Securities.

d. When the ratio of Short Interest to outstanding shares of an Eligible Security exceeds three percent (3%), that security shall no longer be eligible for the remainder of that period; however, said security may be included in the list of Eligible Securities at the next review period if, at the time of the review, the ratio of short interest to outstanding shares is below three percent (3%) of the outstanding shares of the security.

e. In the event that a particular security subsequently becomes not eligible for short selling, no short selling orders will be accepted by the trading system.

II. Execution of Short Selling Orders

a. Only Trading Participants are allowed to enter short selling orders. Customers who want to place short selling orders must course these orders through their respective Trading Participants. This restriction shall apply even to those customer who have Direct Market Access (DMA).

b. Trading Participants shall now enter Short Selling Orders during the following trading phases: Pre-Open, Pre-Close, and Run-Off/ Trading-at-Last.

c. Trading Participants may enter Buyback Orders at any time from Pre-Open to Run-Off/ Trading-at-Last. A Buyback Order shall be understood to be a Buy order that is executed for purposed of closing or covering a short interest.

d. Trading Participants shall enter Short Selling Orders as day orders only.

e. Trading Participants shall not execute Short Selling Orders and Buyback Orders for aggregated/bundled accounts, the Odd Lot Market, and Block Sales.

III. Uptick Rule

Trading Participants must comply with the uptick rule under SRC Rule 24.2-2 and Section 5.2(b) of the Revised Trading Rules of the Exchange, or relevant revisions thereto. For purposes of complying with the uptick rule, information on the last traded price should be readily available in the order-entry window of the Trading Participant for reference prior to posting of the order.

IV. Flagging and Trade Amendments

a. A Trading Participant must accordingly flag an order as a Short Selling Order or a Buyback Order. Flagging Buyback Orders assists the Trading Participant in determining its short interest in a security. An order cannot, however, be flagged by the Trading System as a Buyback order when the security subject thereof is not in the list of Eligible Securities. For securities with short interest but not in the current list of Eligible Securities, the Trading Participant shall comply with the reporting requirements under section 5(a).

b. A Trading Participant shall be allowed to amend, through the Exchange’s Trade Amendment facility, a trade from Short Sale to a regular sale, and vice-versa. Amendments of Buyback Orders, however, may not be effected through the Exchange’s Trade Amendment facility and will have to be manually recorded by the Trading Participant.

c. Partial amendments of a trade shall not be allowed.

d. Trade amendments should be made no later than 12:00 pm on T+1. All such amendments shall be considered effected on the following trading day and shall be reflected in the Exchange’s system accordingly.

e. All other existing guidelines of the Exchange on trade amendments that are not inconsistent with the foregoing, including the imposition of the trade amendment fee, shall be applicable.

V. Reportorial Requirements

a. Unless otherwise prescribed by the Exchange, the Trading Participant shall submit to the Exchange by 5:00 pm of the trading day a report on its short interest and other reportorial requirements in such format prescribed by the Exchange.

b. The Exchange shall publish a list of Eligible Securities on its website by the fifth trading day of each calendar month. Any change in the criteria or schedule for the determination of the eligible securities shall likewise be announced.

c. At the end of each trading day, the Exchange shall publish on its website the short interest in Securities traded on the Exchange.

VI. Responsibility of Trading Participants

A Trading Participant shall be responsible for all short selling orders and buyback orders that are entered into or executed in the Exchange, regardless of whether such orders are for its own account or for its client’s account.

VII. Violations and Penalties

Violations of the relevant provisions of the Revised Trading Rules on Short Selling, these Guidelines, and any amendments thereto shall be penalized in accordance with Article IX of the Revised Trading Rules.

The Trading Participant shall also continue to be bound by the other provisions of the Revised Trading Rules and any amendments thereto, as may be applicable, and shall be held liable for any breach of such rules and regulations.

Source: Philippine Stock Exchange

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James Ryan Jonas teaches business management, investments, and entrepreneurship at the University of the Philippines (UP). He is also the Executive Director of UP Provident Fund Inc., managing and investing P3.2 Billion ($56.4 Million) worth of retirement funds on behalf of thousands of UP employees.