Description

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Picture Courtesy: HinduBusinessline

Context:

The Securities and Exchange Board of India (SEBI) is considering changes to short-selling regulations.

About Short Selling

Short selling is a strategy where traders profit from a decline in the price of an asset, often a stock.

In a short sale, investors borrow shares of a stock they believe will fall in value, sell those shares on the open market, and later buy them back at a lower price to return to the lender.

Short-Selling Framework

Currently, short-selling is permitted only for stocks in the Futures and Options (F&O) segment. Investors must fulfill their delivery obligations at settlement time, and naked short-selling (selling without borrowing the stock) is strictly prohibited.

Institutional investors must disclose upfront if a transaction is a short sale, while retail investors have until the end of the trading day to report their short positions.

Brokers and exchanges are required to publish weekly scrip-wise short-sale positions, and trading members face penalties of 0.05% of the shortage value for failing to deliver securities.

Proposed Changes by SEBI

Allowing short-selling for all stocks except those in the trade-to-trade (T2T) segment, which would broaden the range of securities available for short-selling strategies.
Eliminate mandatory short-sale disclosures for both institutional and retail investors.
Remove stock exchanges' enforcement role regarding settlement failures once the direct payout of securities is fully implemented.
Stocks purchased in earlier settlements but awaiting delivery to a demat account will not be considered short sales.

Market Impact

Allowing short-selling across more stocks may improve market liquidity, particularly for securities that currently see lower trading volumes.
Eliminating disclosure requirements would simplify compliance for both investors and brokers, potentially reducing operational costs.
The direct payout system aims to make the settlement process more efficient and transparent, which reduces the role of brokers in the transfer of securities.

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SEBI's “When-listed” Platform

SEBI Allow Algo Trading in Retail

Source:

THE HINDU

PRACTICE QUESTION

Q.Which of the following statements accurately describe the fundamental principle of short selling?

1. Investors sell borrowed securities with the expectation of buying them back at a lower price later.

2. It is a strategy employed only in bull markets to amplify profits.

Which of the above statements is/are correct?

A) 1 only

B) 2 only

C) Both 1 and 2

D) Neither 1 nor 2

Answer: A

Explanation:

Statement 1 is correct:

Investors who engage in short selling believe that the price of a security will decrease, and to profit from the anticipated price decline, they borrow the security (such as stocks or bonds) from a broker. Then, they immediately sell these borrowed securities in the market at the current price. Once the price has declined to their expected level, they buy back the same number of securities in the market at the lower price. Finally, they return these purchased securities to the broker from whom they initially borrowed them.

Statement 2 is incorrect:

A bull market signifies a period where asset prices are generally rising. Short selling is a strategy designed to profit from falling prices, which are characteristic of bear markets or periods of market downturn. While short selling can theoretically be used in any market, it is not a strategy to amplify profits in a bull market.