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Emerging Markets

HK short selling plan makes sense, but not now

Retail investors should have as much right as fund managers to short stocks. But Hong Kong’s stock exchange would be well advised to hold punters back from short selling until markets have recovered some stability.

Hong Kong’s stock exchange is considering making it easier for investors to sell stocks short, exploring the feasibility of a central stock borrowing and lending facility. This would apply to institutional and retail investors alike but it will have more of an effect on retail accounts, who currently have limited options for short selling.

At first glance, the move looks fair. Hedge funds and other large investors can profit from markets tumbling as much as rising, so why not retail investors?

The obvious answer is that retail accounts are by definition not professional investors, so their market access should not be equivalent to that of a large, market-savvy fund manager. But selling a stock short is not the same as buying a mini-bond, and Hong Kong accounts — and their brokers — should be trusted to speculate on one direction as much as the other.

The real question is not whether more investors should be given the flexibility to sell stocks short, but when.

The exchange should be cautious about increasing the sources of volatility in a market that is still vulnerable to bad news from Europe, dodgy economic data from the US, fears of corporate governance in China, turmoil in the Middle East and rising inflation in Hong Kong.

And the move to allow more retail investors to short could have a big effect on the market. Retail investors locally and from abroad accounted for 26% of trading in Hong Kong’s stock market between October 2009 and September 2010, according to the most recent data.

The Hang Seng index is down 17.2% since the beginning of August. That will have stung many investors that were unable to take out short positions, and there is a moral argument that they should have been allowed to protect themselves by shorting stocks.

The exchange, then, is right to consider improving its infrastructure and levelling the playing field between retail and institutional investors. But timing is key.

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