This is about the Hong Kong Short Selling. America needs to follow suit in my opinion to protect American investors from the short selling that is stealing their hard earned money.
Every day on the stock market, millions of shares may have been sold by people who do not own them, but expect to profit from the deal.
However in America they DEMAND they make a PROFIT!
Selling something you do not have and coming out legitimately ahead is not an easy concept to grasp. But it is a well-established practice in financial markets.
It is called short selling and is a strategy for making money in a falling market. An investor who believes a stock is set to fall in value, will short sell the stock, expecting to buy it back at a lower price.
If the tactic works, the profit is the difference between the two prices.
This sounds easy. If I think a stock is going to fall, even if I do not own it, I can tell my broker to sell a few board lots, wait for the price to go down, buy back the stock at a lower price, deliver it and collect the price difference. Is that all?
You may run the risk of breaking the law. Short selling of a stock is prohibited in Hong Kong unless, at the time of the sale, the seller possesses, or honestly and reasonably believes that he possesses, a legal right to deliver the stock to the buyer.
Additionally, not all stocks are allowed to be short sold. Only designated securities specified by the Stock Exchange of Hong Kong (SEHK) are eligible for short selling.
The maximum penalty for illegal short selling, also known as naked short selling, is a fine of HK$100,000 and 2 years' imprisonment.
So what is the correct procedure?
To conduct short sales legally, you must first make sure that the stock is on the list of designated securities for short selling. The SEHK reviews the list periodically, and the latest list is available on its website.
Before placing a short sale, you have to enter into a valid stock borrowing arrangement with an existing holder of the stock concerned, and you must ensure that the stock lender have adequate shares for lending. You could ask your broker to arrange this, and you will be charged for the arrangement. This procedure ensures that you acquire the right to the stock required under the law and can deliver the stock on the T+2 settlement day to fulfil your settlement obligation.
When you place the order, you must tell your broker that you are selling short and that you have in place a stock borrowing arrangement. It is a criminal offence to conduct short sales without reporting such transactions. This may result in a maximum fine of HK$50,000 and one year's imprisonment.
In addition, the short sale can only be executed through the SEHK's Automatic Order Matching and Execution System (AMS), and cannot be made below the best current ask price, known as the "tick rules".
Is it legal to short sell a stock and then buy it back on the same day?
Some investors have the misperception that such a strategy is legal. However, just because you can settle a short sale does not necessarily imply that the deal is legal. You must always follow the above procedure.
What are the risks of short selling?
The biggest risk is making the wrong call. If the stock soars after the short sale, you will have to buy it back at a higher price. You cannot hold your position for recovery as you can if you buy a stock which subsequently falls, unless you roll over your stock borrowing arrangement, which will increase your costs.
If the stock you have short sold is suspended from trading, you will need to extend your stock borrowing arrangement and expose yourself to unpredictable risk over the suspension period.
How about if I conduct illegal short sales inadvertently?
This is possible if you make a mistake in the number of shares you hold and instruct your broker to sell more than you possess. This could happen if a previous buy order failed, or if there has been a consolidation of shares which you failed to note.
In such cases, your broker (or Hongkong Clearing) will force the buying in of the stock at whatever prices and report the short sale to the SEHK.
To avoid conducting illegal short sales inadvertently, you must, before placing a sell order, check with your broker whether you have got enough shares. You should also be well up in the company announcements.
Works for me!!!! But this is Hong Kong not America.
P2bAAAT & DSAS |
