HONG KONG (Reuters) - A U.S. clampdown on short selling is unlikely to reverse a decade-long trend in Asia of easing restrictions on the sometimes-controversial practice, which market players say has boosted trading volumes and the growth of local hedge funds.
The U.S. move this month came almost exactly a decade after Asia suffered its own financial crisis, spurring authorities in markets like Hong Kong and Malaysia to crack down on short sellers to ease pressure on local financial markets. In some cases, they imposed tough rules that are still in force.
With their stock markets tumbling, U.S., UK and Australian authorities are now in the process of tightening rules and trying to get short sellers to disclose more about their positions.
While some industry veterans fear Asian authorities could use the trend as “cover” to slow reform or impose tighter short selling restrictions in the event of a renewed crisis, there are widespread doubts they would be prepared to turn back the clock.
“Asia is more mature now and won’t follow the U.S. bad example ... it’s not necessarily going to say that what the U.S. is doing is the right thing,” said George Long, chairman of Hong Kong-based hedge fund manager LIM Advisors.
Short selling occurs when investors borrow securities and sell them in the hopes their price will drop, allowing them to buy them back later for less money and pocket the difference.
China bans short selling outright. But the practice is allowed, with limitations, in most other major Asian markets.
U.S. regulators stunned financial markets this month with an emergency rule to limit certain types of short selling in shares of major financial firms. These included Citigroup (C.N), Goldman Sachs (GS.N) and Lehman Brothers LEH.N as well as embattled mortgage giants Freddie Mac FRE.N and Fannie Mae FNM.N.
Regulators said that naked short selling — putting in a short stock order with no intention of actually borrowing it to drive down the price — may have contributed to this year’s collapse of Bear Stearns and sharp declines in other financial shares, which have rattled stock markets around the world and raised questions about the stability of the financial system.
“The actions in the U.S. were surprising in some respects because it’s not part of what they’ve been preaching all along to people here in the region,” said Julius Wang, a managing director with Hong Kong-based Vision Investment Management.
“What we see (in Asia) are regimes and regulators that are loosening up in that regard. They’re trying to encourage freer markets.
Wang, whose firm runs about $1.3 billion in fund of hedge funds portfolios, said none of the Asian managers he had spoken with had voiced concerns about Asia fallout from the U.S. action.
Shorting trends are closely watched by Asian hedge funds because many managers in the $155 billion industry follow strategies that rely on the ability to both sell short stocks they think will fall and buy those they think will rise.
Research firm Eurekahedge said of the 1210 Asia-Pacific focused hedge funds in its database at the end of June about 55 percent used this long/short equity strategy, compared with about 41 percent of U.S.-focused hedge funds.
Even so, short-selling in Asia is far less prevalent than in the United States, partly because the lower liquidity of many Asian markets makes short trades harder to pull off. The cost of borrowing stock is also often higher, cutting into any profits.
Short sellers also still face restrictions in many markets. These include Hong Kong’s “uptick” rule, which bars short sales below the best current ask price and limits the ability of short sellers to build positions in a falling market.
The U.S. repealed its own tick-test rule, implemented after the 1929 stock market crash, in June 2007.
But in a sign the trend is toward easier, not tougher shorting rules, Hong Kong’s Securities and Futures Commission confirmed this month that it had reviewed and approved a proposal to relax the uptick rule. It is now working with Hong Kong’s stock exchange (0388.HK) on implementation.
The Taiwan Stock Exchange also recently lifted the uptick rule for a number of stocks.
Last year Malaysia lifted a nine-year ban to allow short selling of some stocks. And India’s market regulator said last year it would allow foreign and domestic institutions to join retail investors in the ability to short sell.
“We see more clients wanting to use short-selling in order to implement a trading strategy and this is extending to funds which have been traditionally long only,” said Eddie Guillemette, co-head of Pacific Rim global markets and financing sales with Merrill Lynch in Hong Kong.
“Generally speaking, regulators in Asia do understand that short selling is beneficial for the market and helps to create liquidity.”
Still, some financial industry executives fear the clock could be turned back.
Regulators in Asia and elsewhere have traditionally taken their cue from U.S. trends, said Kirby Daley, head of capital introductions with the Asian prime brokerage arm of Newedge Group in Hong Kong.
“I don’t see anything that would prevent an eventual turning of the tide to follow what’s happening in the U.S.” he said.
(Additional reporting by Michael Flaherty in Hong Kong and Nishant Kumar in Mumbai)
Editing by Kim Coghill