Short selling is illegal, SCA reminds stock investors

Brokers have said that foreign investment banks helped exaggerate the fall by taking short positions on local stocks.

Amid reports of short-selling fuelling volatility on UAE bourses, the federal markets regulator yesterday warned banks and brokers that the practice is illegal.

The Dubai Financial Market General Index slumped 34 per cent between mid-November and mid-December as the decline in oil prices triggered concerns over economic growth before recovering half of the lost ground last week.

“The regulations and mechanisms of trading on the exchanges do not allow short-selling and do not support the practice,” the Securities and Commodities Authority (SCA) said yesterday.

“The regulator has not provided approvals to any local entity to short sell and any activity in this capacity would be subject to fines and legal enforcement,” the regulator said.

Short selling is the practice of selling borrowed shares in the hope of buying them back later at a lower price returning them to the original owner and keeping the difference.Brokers have said that foreign investment banks helped exaggerate the fall by taking short positions on local stocks.

But the strong rebound forced short sellers to cover their positions, they said.

On December 18, Dubai’s index jumped 12.9 per cent and on Sunday it advanced again, this time 9.8 per cent. Most stocks rose above 10 per cent on both days.

“What SCA is saying is that we as a regulator with local companies under us, are in compliance and there’s no short-selling. Which is correct,” said Mohammed Ali Yasin, the managing director at NBAD Securities.

“But what we are saying is short selling is available, offered by foreign institutions to their clients over the counter, outside the jurisdiction of SCA.”

SCA, which regulates trading on the Abu Dhabi Securities Exchange and Dubai Financial Market, yesterday saidthat despite the rules it passed on short-selling in 2012, the practice is reserved for market makers.

A market maker is a broker and dealer that balances supply and demand for shares by matching buyers to sellers.

The market maker holds inventory and stands ready to buy or sell shares when there are no public buy or sell orders, thus creating a market. It also has the ability to short.

NBAD has been appointed as a market maker, but is yet to start operating.

“We would love that activity [short selling] to be more widely available and protect the market from extreme negative affects from people outside the regulations,” Mr Yasin said.

“With transparency, you can see it, price it. But with the opaqueness that exists you could mistake the short selling for panic.”

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Published: December 24, 2014 04:00 AM


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