When an army of online traders decided in 2021 to take on Wall Street hedge funds that had shorted US video game retailer GameStop, a man in Manila was monitoring the mayhem that followed: Philippine Stock Exchange chief executive Ramon Monzon.
Monzon is pushing to launch short selling in the Philippine stock market to attract foreign money, but local regulators have raised several concerns, including fears of the wild price swings that were seen during the GameStop frenzy.
“They [the Philippines Securities and Exchange Commission] were worried it would end up becoming like GameStop,” Monzon recalled during a recent interview with Nikkei Asia.
Monzon has since moved to mollify regulators, explaining that foreign funds would boost liquidity in the PSE and modernise an exchange whose product offerings lagged behind its south-east Asian peers.
“We are way behind without short selling,” he said.
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Short selling is a trading strategy that allows investors to bet on the price of a given stock falling. It involves borrowing shares and selling them at one price, in the hopes of buying the same number of shares at a lower price later to return them to the lender.
The PSE index settled at 6,620.83 on May 22, barely improving from the end of last year and still down 27 per cent from its peak in January 2018. The Philippines has largely recovered from its deepest postwar recession in 2020 after prolonged pandemic lockdowns, but high inflation and rising interest rates are lingering risks.
Monzon said that, without hedging options, foreign investors were more likely to manage risk by withdrawing from the market. About 275bn pesos ($4.92bn) worth of foreign funds exited the Philippine stock market from 2018 to 2022, wiping out much of the gains since 2009, according to CEIC Data.
“Our market is a ‘long-only’ market, such that if there are any uncertainties in the Philippine market . . . [foreign investors] are going to sell and get out. Otherwise, how will they protect their investment?” Monzon said.
The regional stock exchanges in Singapore, Indonesia, Thailand and Malaysia already allow short selling, while Vietnam in 2020 considered introducing it.
The Philippines SEC in late 2019 approved guidelines governing both the borrowing and lending of securities and short selling. But their implementation is still being ironed out.
The SEC was reviewing an application by the Philippine Depository and Trust Corp to serve as the securities borrowing and lending agent, the last major regulatory approval needed before the exchange can introduce short selling, Monzon said. The PSE was ready to launch the strategy once the PDTC obtained clearance, he added.
To address the SEC’s earlier concerns about the use of foreign assets as collateral for borrowed shares — namely that local investors would have trouble seeking recourse if collateral was held overseas — Monzon said the use of offshore collateral would be limited to local and foreign institutional investors who had custodians in the Philippines.
“I keep telling the Securities and Exchange Commission, this is the first step that we need to do to be able to attract back the foreign investors,” Monzon said. “We need the hedge funds here. Hedge funds are very important in any market now.”
He said a GameStop-like scenario, in which short positions exceeded 100 per cent of available shares, would not happen in the Philippines.
Under PSE rules, only the 30 blue-chip companies that make up the PSE index and only 10 per cent of their outstanding shares can be shorted. There must also be a price uptick before a stock can be shorted. The rules are subject to review.
Short selling has come under increased scrutiny in the US amid a sell-off at regional banks, with some calling for a ban on the practice, particularly regarding bank shares.
But Monzon, a seasoned accountant with an MBA from the University of Chicago, has a different perspective. “They [short sellers] bring sanity to the market,” he said. “So, for me, short selling is a very good product.”
He cited the cases of US energy group Enron, which collapsed in 2001 after short seller Jim Chanos helped expose its dubious accounting practices, and of India’s Adani Group, whose frothy valuations were decimated early this year after a scathing attack by short seller Hindenburg Research. The US group accused Adani of “brazen stock manipulation and accounting fraud”, allegations that the Indian conglomerate denied.
Philippine blue-chip companies, mostly backed by the country’s influential family-owned conglomerates, were on board with the short selling plan, Monzon said.
“If your company is, say, a solid and upright company, you have nothing to worry about,” Monzon said. Otherwise, “you will get nervous”, he added.
Luring foreign investors back to Manila is crucial for PSE, which seeks to encourage listings from big companies and medium enterprises.
Monzon said he expected 14 companies to go public this year, up from nine in 2022, including mid-cap companies under a PSE programme that prepares them to launch initial public offerings.
But big IPOs will probably need sizeable foreign input amid limited local liquidity. Large listings in the pipeline include a $1bn real estate investment trust offering by shopping mall group SM Prime Holdings and the resumption of the up to 33.2bn peso ($595mn) IPO of Prime Infrastructure Capital, owned by the ports and casino tycoon, Enrique Razon, who controls the Philippines’ biggest gasfield.
“They’re a little concerned because the liquidity of the market at this time is very low,” Monzon said of Prime Infra’s IPO delays.
Analysts said introducing short selling was a positive move.
“Another way for a trader/investor to participate in the market will eventually increase market volume, which we sorely lack, and in time improve liquidity, which addresses one of the primary concerns of foreign participants about our local market,” said Bernhard Tsai, chief operating officer of BDO Securities.
Alexander Dauz, Philippines president at Maybank Securities, agreed, but warned: “A key risk would be more pronounced market volatility once investors can position both ways [long and short] in the market.”
A version of this article was first published by Nikkei Asia on May 15 2023. ©2023 Nikkei Inc. All rights reserved.