Reversal on short-selling offers hope in Taiwan

There are signs of growing maturity for Taiwan’s stock market as authorities strive to create a more favourable environment for securities borrowing and lending, market participants say.

On the one hand, a temporary restriction on short-selling – the uptick rule – imposed by the Financial Supervisory Commission (FSC) in August this year was seen as a knee-jerk reaction to placate retail investors amid a falling stock market.

The rule limited short-selling to stocks whose price rose in the previous trading session, thereby prohibiting shorting of shares whose price was falling. It was imposed on August 24, before being lifted again on September 18.

But on the other hand, one Hong Kong-based broker suggested the fact the restriction was acknowledged as counterproductive and lifted within a month pointed to a maturing market.

The head of securities lending for Asia at one large bank suggested the Taiwan Stock Exchange (TWSE) may have influenced the FSC by arguing the uptick rule was ineffective.

“Taiwan’s stock exchange is a champion of our cause for [securities borrowing and lending],” said the Hong Kong-based executive. “They have an uphill battle with the regulator.”

Neither the TWSE nor the FSC responded to AsianInvestor requests for interview.

Both the prime broker and securities-lending executive saw the FSC impose the uptick rule as a reaction to retail investor concerns about tanking share prices.

“[Shorting restrictions] seem to be the weapon of choice for regulators, particularly in Korea, Taiwan and China,” said the prime broker.

The securities lender echoed this view: “This is typical of a regulator seen to be doing something in a time of volatility.”

However, the uptick rule seemed to have backfired, as an apparent change in sentiment among foreign investors may have caught retail investors out.

The prime broker said he saw a pullback in activity by offshore traders when the rule was introduced, especially by quantitative hedge fund managers, which trade based on signals from models.

Before the restriction came in, technology firms had been the most oversold stocks by foreign investors, according to weekly figures released by TWSE. But once the rule was introduced, foreign investors seemed to become more bearish about Taiwanese financial firms, especially those that own securities firms. 

The outlook for the Taiwanese economy and financial industry had already been gloomy, and market participants suggested the uptick rule coming in led investors to further re-assess their strategies.

Local stockbrokers are under pressure in Taiwan. Forty-seven Taiwan-based securities firms and stockbrokers reported losses in August, up from 36 in the first eight months of the year, according to TWSE figures.

Before the reintroduction of the uptick rule, there had been a trend towards deregulation. On June 29, for instance, rules limiting single-account margin trading and short sales had been eased.

Retail investors account for the majority of share trading in Taiwan, while foreign investors own 38% of Taiwan-listed shares by market capitalisation as of September 25.