How would Bucharest trading look like with short-selling tool

After lawmakers’ attempt to stabilize a trading by adopting a set of measures, wall-street.ro initiates a campaign that with the help of specialists in capital markets, is designed to frame the image of BSE if it had more solid financial tools. In our first issue, managers and brokers in the market have outlined a profile of Romanian trading with short-selling instruments.

The instrument could bring additional liquidity

This type of instrument triggers advantages but drawbacks as well. The additional quantum of liquidity is probably the positive core effect that short-selling instrument would have brought to Bucharest Stock Exchange.

“The existence of this instrument would have worked as fuel injection engine, rushing the burning process,” Silviu Enache (photo), chairman of KD Capital Management stated for Wall Street.

“It is obvious that short-selling would have a positive influence over market liquidity, but probaby this is the gloomy side of BSE,” pointed out Marius Pandele, head of research at Vanguard.

A higher liquidity, better trading volumes would have certainly triggered higher incomes both for Bucharest Stock Exchange institution and for brokers, Marcel Marcu, executive at KD Capital Management said.

Gabriel Aldea, broker from Intercapital Invest shares the same opinion. “I strongly believe that the most important contribution of this intrument would be the level of market liquidity, that would have been much higher, with positive implications for all participants to on equity market: investors, brokers, Bucharest Stock Exchange,” he stressed.

If this instrument would have existed in the first place, the declines had not been of this magnitude. There would be enough investors who would have short-selled shares in purpose of risk protection following to start buying on declines, in order to close positions,” said Bogdan Mortu, broker with KD.

High volatility

From investors’ point of view, the presence of short-selling instrument is seen as possibility to restore a part of the last year’s losses.

Pandele believes if the declines were profitable, they had broadest magnitude.

“Most likely the market would have witnessed high turnovers, but also increased volatility. While under current conditions, with stocks having a single profit-bearing direction, the indexes dropped several percents, a situation in which losses could bring profits could be even worse,” he explained.

On the other hand, investors would have had more possibilities to gain, unlike the actual situation. “Anyway, one thing is certain, short-selling could have not keep foreign investors in the country that exited in the early stages of the global financial crunch” added the senior analist with Vanguard.

It is certain that the use of short-selling instrument would have enhanced short-term volatility, soaring the pressure in sale.

Short-selling would have rooted trust and matured investors

Other aspects that short-selling instrument at Bucharest Stock Exchange would have shored up investors and trust in the market.

“The image of equity market would not be so gloomy; most investors are extremely unconfident in possibility of market recovery, and will take some time to bring back confidence in Bucharest trading,” said Bogdan Mortu.

“On the other hand, mounting volatility in the early stages of use of this instrument would have matured investors, and oversized emotional reactions were probably less,” Enache believes.

American equity market regulator, SEC, has temporarily halted short-selling of securities in financial sector, after a similar measure adopted by UK’s lawmakers.

The reason is simple: when a company had or was rumored about of having financial defaults, there were many speculators who sold the borrowed stocks crushing down shares price and causing rout among other investors. When companies experience liquidity shortage, they found it hard to whip it up, wether on equity market or by asset sale, as both own shares and assets were rated at lower price than before.

BSE’s general manager said last week that short-selling instrument will be implemented at Bucharest trading, adding they are useful trading instruments, but in the context of pressured markets, they can influence stock price.

Short selling is the practice of selling a financial instrument the seller does not own, that are usually borrowed from a broker or investor.

Translated and adapted by Camelia Oancea.

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