Rules making it easier for investors to short Japanese stocks will become permanent in November, according to the nation’s markets regulator.
Investors selling borrowed securities in hopes of profiting by repurchasing them at a lower price and pocketing the difference will be allowed to make a trade at any price, unless the stock has fallen 10 percent from the previous close. Currently, short sellers aren’t allowed to accept bids or offer to sell shares below the lowest price offered by long investors. The law is part of a package that will for the first time explicitly include trades made on alternative platforms that display prices, known as proprietary trading systems.
The rule changes will replace a series of ad-hoc short-selling regulations that Japan’s Financial Services Agency has been periodically renewing, including a ban on short sales without holding the underlying security, known as a naked short, in place since October 2008. The announced rules, including the restriction on naked shorts, will become permanent in November, according to an April 23 statement from the regulator.
“The removal of the uptick rule will make easier to take short positions and this will provide more liquidity in the market,” said Makoto Kikuchi, chief executive officer of Myojo Asset Management Co., a Tokyo-based hedge fund advisory firm. “The new reporting and disclosure rule may cause more work on administration and compliance side.”
Sellers will have to report a short position to the regulator once it reaches 0.2 percent of the issued shares, and send a public notice once it reaches 0.5 percent. Reporting and public disclosure are now required for any position above 0.25 percent.
Short sales have accounted for an average of 10 percent of the value of stocks traded on the Tokyo Stock Exchange over the past 30 days and 11 percent over the past five days, according to data compiled by Bloomberg.
The regulator is still reviewing whether and how to widen the scope of trades that could be covered in regulations, according to the statement.
“Making the rules clear and permanent provides greater business certainty, a key feature for investor confidence,” said Jessica Morrison, Asia Pacific head of market structure at Deutsche Bank AG. “Allowing short sellers to place orders outside the spread will encourage more participation at different price levels, reducing volatility while increasing crossing opportunities.”
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