Thai stock market hit by short selling amid falling figures

Speculation on short selling and naked short sales has been linked with causing havoc in the Thai stock market today, as retail investors attribute the continuous market decline to these practices. The Stock Exchange of Thailand (SET) has taken a hit this year with a drop of 14.9% as of November 20 and a decrease in market capitalisation from 3.2 trillion baht to 17.5 trillion baht (US$ 90,847,148,800 to 496,834,625,000).

The Thai market has been impacted both domestically and by external factors such as US and European banking issues, interest rate hikes by the Federal Reserve, and the Israel-Hamas conflict.

Short selling is a legal activity under specific conditions on the SET. It involves borrowing security expected to decrease in price and then selling it on the open market, with the aim to buy back the same stock later at a lower price. This practice can lead to profit-making during market downturns.

However, retail investors have voiced concerns over the potential unfairness of short selling via computer programs and the possibility of rules violations from naked short sales. Naked short selling is the act of short selling without first arranging to borrow the security, which is illegal.

The Securities and Exchange Commission (SEC) has recently suggested the use of the uptick rule, which would require short sellers to only sell when the price increases. This rule would ensure that the sale executes only when the price rises, aiming to curb excessive short selling, reported Bangkok Post.

While short selling can improve market efficiency, it can also exacerbate stock declines and lead to temporary artificial inflation in shares. For instance, South Korea recently announced a ban on short selling until June due to suspicions of naked short trading.

The SET and SEC have found no instances of naked short selling in the Thai stock market, despite retail investors’ scepticism. They believe that naked shorting could be occurring due to foreign investors’ use of algorithm trading programs, such as high-frequency trading (HFT).

The SET has recently announced an investigation into possible short sales, with a particular focus on foreign omnibus accounts that often belong to multiple investors who jointly open an account anonymously. The probe aims to identify the end beneficiaries of short sale transactions and restore market confidence.

If brokers fail to provide proof of stock borrowing, the transaction will be deemed as naked short selling and subject to disciplinary action. In addition to the investigation, the SET is planning to expand the retail investor base to help stabilise the market.