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Wednesday, 8 April 2020

Short selling in Egypt remains anemic, despite potential for covid profits

Short selling in Egypt has remained anemic since the mechanism was launched on the EGX in December, Misr for Central Clearing, Depository, and Registry (MCDR) Managing Director Tarek Abdel Bari said, according to the local press. Over the past four months, the bourse has only seen “a handful” of short selling transactions worth EGP 100k, which is so low it might as well be considered “non-existent,” Abdel Bari said.

The mechanism doesn’t appear to have picked up during the equity sell-off that gripped the EGX (and global markets), even though the market decline was a golden chance for investors to pocket some quick profits, according to Abdel Bari. Prime Holding Managing Director Mohamed Maher thinks the window for short selling the sell-off has already closed at this point, as markets are beginning to recoup losses and are likely to continue on an upwards trajectory, the local press reports.

You can chalk up the low popularity shorting to its still being the new kid on the block, Bari said. Analysts had previously speculated that many brokerages don’t know how the short selling system operates after the mechanism had a lackluster first few weeks on the bourse.

How does short selling work, again? If you think a certain stock is overvalued and that its price will fall, you short its stock. You borrow the shares (for a fee and usually for a set period of time) from someone who holds them for the long-term and immediately sell them on the open market. Pray the share price goes down (or release a report on why you think the share is a dog, as Muddy Waters did with NMC in Dubai last year). The idea is that the share tanks and you can then buy it back on the open market to return what you borrowed to the original owner of the stock (known as “closing out” your position). The problem is if you’re forced (by, say, a margin call) to close out your position while the share is up — and you’re suddenly buying back at a price higher than you paid, with theoretically unlimited losses.

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