Short-Sighted On Short-Selling

Besides providing liquidity to the market, the system also creates a level playing field for sellers and buyers (who go along without any intention of taking delivery).

Nor does Sebi's perception that markets are down mainly due to heavy short-selling hold water.

The National Stock Exchange follows a weekly settlement cycle wherein a short-seller will have to cover his position by the end of the settlement. Thus this system does not allow any short-seller to carry forward his transaction to the next settlement.

As a result, prices which fall mainly due to short-selling move up again due to short-covering, thus balancing the equation.

 

In contrast, the only system where traders can carry forward their short-selling positions, for a period of up to 90 days, is the re-introduced carry forward system, which has proved to be a non-starter.

Interestingly, in the new carry forward system, a trader could end up paying as much as 90-100 per cent of the total transaction cost, which is as good as selling based on actual delivery. So the assumption that short-selling is responsible for the present state of the stock markets is incorrect.

Another argument advanced for banning short-selling is to curb excessive speculation. Though excess speculation is bad for any market, there exist measures like margins and circuit breakers to check that.

A ban on short-selling would see a sharp drop in volumes. Since this would favour only buyers, it would be unhealthy for the markets, upsetting the demand-supply mechanism.

But if Sebi persists in banning short sales, it should do the same for buyers who do not intend to take delivery.