Short-selling set to debut in Egypt as the West moves to curb it

Alex Dziadosz
5 Min Read

CAIRO: Short-selling, one of the financial world s most widely-scrutinized practices, will begin in Egyptian markets over the next few days, according to officials at Misr for Central Clearing, Depository and Registry (MCDR), a company working with the Capital Markets Authority (CMA) to develop the Egyptian stock exchange.

As British and American regulators suspended short-selling last week amid worries that the practice was fueling investors panic and hurting healthy companies, some local press questioned whether the practice s long-planned debut here might be delayed.

Three Egyptian brokerage firms have completed the required training sessions and should be authorized by the CMA to begin short-selling over the next few days, said MCDR Chairman and Managing Director Mohamed Soliman Abdel Salam.

There are no restrictions, no boundaries now, he said.

Potential lenders will begin to contact him to place securities into an MCDR-managed lending pool, Abdel Salam said. Once a company s share in the pool crests the required margins, short-selling of that stock will be allowed to begin.

Short-sellers make money by borrowing stock, selling it immediately, and buying it back at a lower price before returning it, thereby profiting off any fall in that stock s value.

Egyptian markets have so far been unable to accommodate short-selling because they have lacked appropriate lending and borrowing institutions, according to MCDR information.

Introducing the practice should benefit the Egyptian market by adding liquidity and helping to slow drops in stock prices by creating temporary demand for sinking shares, Abdel Salam said.

One of the biggest concerns over permitting short sales is that investors looking to profit off a company s fall will peddle rumors about their targets, swelling investors fears to irrational – and thus, for short-sellers, highly profitable – levels, even when a company is fundamentally sound.

The share prices of Goldman Sachs and Morgan Stanley, two bedrocks of the American financial system, were dented by short-sellers last week, according to many analysts and regulators. Both companies posted higher-than-expected earnings as their stocks slumped.

Last Friday, the US Securities and Exchange Commission (SEC) banned short-selling on 799 financial companies, hoping to stabilize those companies share prices. Their British counterpart, the Financial Services Authority, enacted a similar ban for 32 companies the day before.

For his part, Abdel Salam said he is not worried that short-selling will cause problems in the Cairo system, as regulations here will be relatively tight. I think that system [in the United States] is much more advanced and gives you the right to do whatever you like, he said. We don t have that.

Regulations will limit the amount that short-sellers can borrow, as well as restrict the percentage of a company s stock that can be placed in the lending pool, according information on MCDR s website.

A rule similar to the SEC s uptick rule, which required short sales to be made at a built-in uptick, or a price higher than the last recorded stock value, will also play into the Cairo exchange. The uptick rule was enforced in America from 1934, when short-selling was blamed for worsening the Great Depression, until it was repealed last year.

Rules like this will create a boundary and reduce fluctuations, Abdel Salam said.

The argument that short selling is healthy in most circumstances has helped keep it legal in most parts of the world. According to a number of economists, short sellers can help a market determine a company s real value by working with a set of knowledge and information that penetrates the veneer of press releases, advertising campaigns and obtuse earnings reports.

Short-selling can also be helpful in a market like Egypt simply by luring fresh investors and creating jobs for brokers, traders and lenders.

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