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Monday, 2 December 2019

Short selling comes to the Egyptian stock market

Short selling comes to the EGX: The EGX and Misr for Central Clearing, Depository & Registry (MCDR) yesterday launched short selling on the bourse following approval by the Financial Regulatory Authority (FRA), sources told Al Mal. Beltone and HC Securities were the first brokerages to complete a short selling transaction yesterday, according to the newspaper, after the EGX and MCDR finalized preparations to begin receiving trading orders, including linking custodians with brokerage firms.

So, uh, what’s short selling? Let’s say you’re not a fan of Company X — and you’re convinced its share price will fall. Shorting its stock is how you make (or lose…) money on that belief. You borrow shares from your broker (for a fee, of course) for a set period of time, then you sell the shares immediately. If your hunch is correct and the stock price falls while you’re shorting the shares, you can then buy the shares back from the market (or “close out” your position) and return them to the person or institution from whom you had bought them. If you borrowed the shares at EGP 100, sold them into the market at the same price and then bought them back at EGP 70, then you made EGP 30 on the transaction (setting aside your broker’s fees and commission).

But wait … the downside is effectively unlimited: What if you borrow the same shares at EGP 100 — and then they go up to EGP 170 by the end of the period you specified on, say, news of a new CEO or some other great trigger? You now owe your broker EGP 70. You can learn more from the folks at Investopedia.

So, how does it work in Egypt? At the outset, there’s a list of about 30 securities you can short, and the EGX will review the list of eligible securities every six months. To qualify, shares need to be frequently traded and at least 10% of registered brokerage firms need to be trading the shares in question. Short sellers won’t be able to (easily) pick on the little guy under an anti-bullying provision: You can’t short a stock unless its shares in freefloat account for a minimum of 0.005% of the market cap made up of the market’s total freefloating shares, and any stock that’s going to be shorted has to have at least 300 mn issued shares.

And you had better have the money to put where your mouth is: Folks looking to open a short position will need to put down 50% of the value of the securities borrowed, and brokerages will be required to park 20% of that in fixed-income instruments while the position is open.

EGX negotiates lower software prices for smaller brokers: The EGX has negotiated with providers of the software used to trade shorts to reduce the prices to between USD 2,000-3,600 (EGP 32k-58k) from USD 9,500 (EGP 153k) after brokerages last month complained to the FRA that the high cost could place short selling out of their reach. The bourse has proposed that the 10 large brokerages that already have the software set up a joint company to provide smaller brokers with the software at lower prices, sources say.

Shorting on the EGX has been a long time coming: The EGX and MCDR moved in August 2017 to upgrade the bourse’s trading systems to handle short selling, which was theoretically allowable at the time. Fast forward to May 2018 and the FRA had approved the necessary amendments to the Capital Markets Act’s executive regulations, raising expectations that short selling could be introduced in September. More than a year and several regulatory approvals (see here and here) later short selling has finally made its way to the Egyptian market. The FRA has so far granted 51 brokerages licenses to facilitate short selling.

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