The EGX is allowing investors to short smaller companies: The EGX yesterday approved plans to allow investors to short smaller companies in a bid to encourage short selling activity which has failed to take off on the exchange since it was launched in December, it announced in a statement (pdf). The bourse currently only allows investors to short larger companies which account for a minimum 0.005% of the exchange’s total freefloating shares, but under the changes companies with a smaller market cap of 0.001% will be eligible for short selling. The original threshold was put in place to shield smaller businesses from being pummeled by predatory short sellers but will now be lowered in a bid to boost liquidity and trading, EGX Chairman Mohamed Farid said.

What is short selling, again? Think of it as betting against a stock. Investors who think a certain company is overvalued will borrow a bunch of shares and immediately sell them back to the market in the hope the price will fall. If the share price tanks, the investors can then buy them back and return them to the original owner, pocketing the difference. But if the stock rises, they will be forced to purchase them at a higher price than they sold, potentially leaving them with hefty losses.

Short selling has yet to take off on the EGX even as stocks suffered heavy losses during the height of the covid-inspired market meltdown in March. The EGX saw modest short selling transactions worth just EGP 100k during the first four months of 2020, leading Misr for Central Clearing, Depository & Registry (MCDR) Managing Director Tarek Abdel Bari to describe it as “non-existent.” Abdel Bari attributed the disinterest to its relatively recent introduction to the market.

The list of new securities eligible for shorting will be announced by the EGX today, the statement said.

Background: The EGX and MCDR last year launched short selling on the bourse following approval by the Financial Regulatory Authority (FRA) after amending the Capital Markets Act’s executive regulations and in 2017 upgrading the bourse’s trading systems to handle the transactions. The FRA as of last year had granted 51 brokerages licenses to facilitate short selling. There are currently 30 securities eligible for shorting.