MANILA, Philippines–  Amid Philippine shares plunging into bear territory, the Philippine Stock Exchange (PSE) announced it will introduce short selling in the local bourse to attract more investors.

The PSE secured the approval from the Securities and Exchange Commission (SEC) after a meeting last June 5, according to a memorandum released to the media last June 22. 

This is the first time the PSE will introduce short selling into the market.

“We are optimistic that this facility will lend support to our securities borrowing and lending program and help improve liquidity in our market,” said PSE President and CEO Ramon Monzon.

In short selling, a trader may sell a stock that he or she does not own by “borrowing” its underlying securities. 

Traders engage in short selling if one speculates that a company’s stock price will decline. Once the price does dip, the trader can then buy it back at a lower price and earn profit.

Short selling is in place in several exchanges and is utilized by investors as a hedging mechanism.

The PSE said only 10% of outstanding shares can be shorted for eligible securities. This ensures for the “orderly conduct of short selling activities, while still providing ample room for price discovery.”

Members of the benchmark PSE index (PSEi) and exchange-traded funds are the only eligible securities for short selling transactions.

Short selling will also be restricted during the market’s pre-open, pre-close, and run-off phases.

“Trading participants will have to ensure that the client has entered into the necessary securities borrowing arrangements prior to entering a short selling order,” the PSE said.

“Even with a limited number of eligible securities and a cap on short interest to begin with, we believe that the ability to take short positions will further spur trading activity and attract more investors to our market,” said Monzon.

The PSE will conduct various activities for investors and other stakeholders in the coming weeks to inform them of the guidelines for short selling transactions. – Rappler.com