CAPE TOWN - NEW REGULATIONS that were likely to require the disclosure of short positions on the market were being developed by South Africa's Financial Sector Conduct Authority (FSCA), the JSE's market regulation director Shaun Davies said yesterday.
This month millions of retail investors in the US known as the “Robinhood Redditors”, in an uncharacteristically united front on social media, sharply bid up the shares of some poorly performing US-listed companies such as GameStop, forcing massive financial losses on traders that had shorted the price and on hedge funds.
The sharp spike in retail trading activity in the US has been fuelled by zero-commission trading, lockdowns, US fiscal stimulus cheques and colder temperatures, according to a report on the Markets Insider website.
But a JSE trader, who wished not to be named, said there had clearly been an element of anti-establishment “slap in the face of the suits” to the concerted driving up of the share prices.
NFB Asset Management managing director Paul Marais said: “Clearly, the pent-up frustrations at the financial services industry is starting to become more apparent, making it increasingly likely that the broader trend around the democratisation of finance is likely to persist.”
After the highs of last week, GameStop shares were already down 80 percent this week, indicating “that the bubble is starting to burst”, said
Marais. Ryk de Klerk, an analyst-atlarge and Business Report columnist, wrote this week that the JSE was not likely to be immune to such shocks in the future.
He said the US Securities and Exchange Commission (SEC) was launching an investigation into possible wrongdoings following the mayhem on Wall Street, but that the SEC offered no protection against actions by short-sellers.
Short selling can lead to the implosion of stock prices of well-managed companies, can result in credit lines being cancelled and customer bases drying up, and even a collapse of the company.
In the US, data on the short percentage of float data is available to retail investors, but was not available for the South African retail investor on the JSE, to observe share lending activities, the core ingredient in short-selling, said De Klerk.
The FSCA said they needed more time to comment on Business Report questions.
The JSE trader said short selling on the JSE was facilitated by the lending out of shares primarily by financial institutions, and for instance, it was well known on the market there had large short positions on Steinhoff and African Bank shortly before their share prices collapsed.
Davies, in response to Business Report questions, said the JSE did not know the aggregate size of short positions in JSE-listed shares, and therefore it could not disclose these figures.
“It is the FSCA rather than the JSE
that is in a position to implement a requirement of this nature, as it requires an investor to disclose the size of their short position and the JSE does not have regulatory jurisdiction over investors,” he said.
He said the JSE could only impose regulatory obligations on its member firms.
The JSE deploys “circuit breakers” which trigger temporary halts in trading of securities during periods of extreme market volatility for five minutes at a time, so as to provide investors with a “brief pause to better understand market conditions and
make or adjust their trading decisions accordingly”.
Davies said these circuit breakers did not aim to prevent extreme price movements or limit the extent to which share prices could move.
“They are not intended to prevent investors from expressing their sentiment on a particular share, either by limiting price movements or by preventing investors from trading for a significant period of time. If there is strong momentum behind the movement in a share price (either up or down), after the market has paused when a circuit breaker is triggered
and trading recommences, the price may well continue along the same trajectory,” he said.
Davies said: “Time will tell whether the recent activity in certain US listed stocks will be found to be unlawful or harmful to the public interest and, if so, whether steps should be taken to try to prevent a recurrence in future.
“It is too early to say, and there is insufficient information to conclude whether activity of this nature should be prevented from occurring in a securities market, as unusual and extreme as it may look to most observers at the moment,” said Davies.
BUSINESS REPORT