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Watchdog on lookout for stock short selling
Ika Krismantari , The Jakarta Post , Jakarta | Fri, 09/26/2008 11:03 AM | Business
Indonesia's securities watchdog, the Capital Market Supervisory Agency (Bapepam-LK), has formed a special team to spot the occurrence of illegal speculative practices in short selling, popularly known as shorting.
Bapepam chairman Fuad Rahmani said on Thursday the agency had already formed a team to monitor practices in the stock market, and would provide a report next month.
"There is already a regulation on the banning on short selling. We are just going to strengthen supervision and law enforcement," said Fuad.
Bapepam issued in May a regulation banning short selling and margin trading in the light of the volatility in the stock market, which saw the Jakarta Composite Index (JCI) drop 16.64 percent during the first quarter of the year.
Short selling is the practice of selling stocks to create panic in the hope of repurchasing them later at a lower price.
Short sellers borrow the shares in question from other parties while speculating that the price of the stock will fall, so that they can profit from it.
For example, a publicly listed company named Bina Media has shares that sell for $10 each. A short seller would borrow 100 shares of Bina Media from other parties, then sell them for a total of $1000.
If the price of the shares later falls to $5 per share, the short seller would then buy 100 shares back for $500, return the shares to their original owner and make a $500 profit.
Naked short-selling is an extreme version of short selling, in which the sellers don't even borrow the shares before selling them, while the transaction remains open until the shares are acquired by the seller.
Short selling has been widely blamed for having exacerbated the problems of the Wall Street financial giant Lehman Brothers, which then collapsed and did a lot of damage to the shares of insurance giant AIG.
Governments around the world have now jumped on the ban wagon to prohibit the practice from damaging their financial sector.
President director of the Indonesia Stock Exchange (IDX) Erry Firmansyah said short selling practices had already been banned in Indonesia, as they exacerbated volatility in the country's stock market.
"If here are such practices, they are illegal. Investors who want to sell their shares should possess the securities or guarantees, not borrow them from others," he said.
Erry believed that looking for proof of such practices was complicated and could take a long time because of this complexity, which involved brokers, investors, and banks.
