CAIRO: The testing of a computer system for short-selling stocks will begin on June 2 and is expected to be completed by September, after which investors will be able to sell stocks they do not own.
Regulations to allow the short-selling of certain stocks were introduced earlier this year, and the implementation of the new IT infrastructure will make short-selling a reality.
A typical security transaction involves the purchase of the security by an investor followed by an eventual sale. Short-selling is essentially a reversed version of this process, whereby an investor borrows a security that is owned by another investor, sells that security and later repurchases it and returns it to the original owner.
While regular investors gain from price increases, short-sellers gain from a decline in the price of a stock.
A specific process involving the brokers, the depository and the stock exchange is necessary to enable short-selling.
To have this system, we have to have a fund run by Misr Clearing, Settlement and Central Depository (MCDR), we have to have the tools, we have the person who will lend us the security and we have to train the brokerage firms to be capable and understand the mechanism of this system, explains MCDR Managing Director Tariq Abdel Bari.
Investors who are prepared to lend their securities will place these stocks in a fund managed by MCDR. Short-sellers will then borrow securities form this fund against some form of collateral.
When the new borrower sells the security, they have to pay collateral and they don t get the money after selling the security, says Abdel Bari. The money and the collateral will be kept with the MCDR, invested in a very secure kind of investment and the yield of these investments would go back to the main owners of the securities.
Abdel Bari explains that short-selling will complement same-day trading by balancing positive and negative expectations.
With same-day trade, you buy securities in the morning and sell it in the same session, if you wish, when the price goes up, says Abdel Bari. [Short-selling] is for someone who has an opposite expectation – if the market is going down, you will sell first and then buy.
As a result, he expects that short-selling will reduce volatility in stock prices.
Both the systems will create a mechanism in the market to control it and to keep it at a certain limit, says Abdel Bari. In other words, those two systems will stop the high upswing or the harsh downswing.
Abdel Bari also denies that short-selling by speculators may exacerbate a decline in share prices.
When you have a security and you wish to sell it, you sell it, because you are expecting prices to go down and the person who buys from you is expecting prices to go up, says Abdel Bari. Now we re giving the investor the [opportunity] to borrow and sell when he has the expectation that prices will go down. When he has the expectation that prices will go up, he will buy in the morning and sell on the same day. This way, the market will be balanced.
The introduction of short-selling will accompany same-day trading in an expanded range of options available to investors. Some investors may also use short-selling to hedge their portfolio position.
Short-selling and same-day trading involve an improvement of the computer systems and processes that are central to the functioning of the stock market, an improvement that may someday enable electronic trading.
In terms of products, options and futures have not yet been introduced into the Egyptian stock market. Maged Shawky, chairman of the Cairo and Alexandria Stock Exchange, told The Daily Star Egypt earlier that the regulations and mechanisms for simple derivatives contracts will be established by 2007.