Short-sale stocks see mixed results as investors aim to cover positions

The China Post news staff

Major shares targeted for short sales by investors yesterday showed mixed performances as investors made moves to cover their positions, with some rallying significantly and some still declining, according to market sources.

The sources said that Taiwan Semiconductor Manufacturing Co. (TSMC) and AU Optronics (AUO) rallied sharply immediately after the local stock market opened yesterday morning, as foreign institutional investors rushed to purchase shares of both firms to cover their short sales positions, mainly inspired by the encouraging revenue performance of the Thanksgiving holiday and bright future sales prospects. Some of the top-20 shares in terms of short sales failed to perform well due to weak repurchases made by institutional investors engaged in short sales. For instance, China Steel saw its price dip, HTC’s share price plunged 3 percent, and Acer’s stock price also failed to gain momentum for a rally.

Nevertheless, the weighted share price index of the local bourse yesterday surged 1.68 percent, or 114.26 points, to close at 6,898.78 on trade volume of NT$74.82 million, with display-panel shares and semiconductor stocks leading the rally.

In view of the massive short sales of Taiwanese stocks by foreign investors recently, the FSC and Taiwan Stock Exchange (TSE) have recently looked into securities borrowing by foreign institutional investors and discovered some problems.

Since it takes time to review and revise institutions, the FSC decided last Thursday to embrace some market stabilization measures in the short term. First, it will remind insurance firms to evaluate the cost and returns for lending securities to foreign investors, such as the effect on their own stock-investment positions. It won’t, however, ban such practices outright.

Second, the FSC will review the legality of loan-oriented securities borrowing. Some banks, for instance, would borrow securities from foreign investors and then provide them loans, actually using the borrowed securities as collateral.

Third, the TSE will notice abnormal order placement by foreign institutional investors. Fourth, the TSE will pay attention to trades with massive fluctuations in price and volume on the stock and futures market and adopt proper measures in cases of illogical or abnormal trading. Fifth, the FSC will invite foreign investors for unofficial talks.

On Nov. 21, the FSC announced the lowering of the total sales amount of borrowed securities in mid-session, a move which will alleviate the decline of individual stocks, especially stock-index constituent stocks.

Under the new regulation, which took effect on Nov. 22, the total commissioned sales amount of borrowed securities in mid-session is capped at 20 percent of the average transaction volume in the previous 30 trading sessions, rather than 3 percent of the shares in circulation originally.

The original regulation cannot achieve the goal of total-amount control, due to the large denominator. The new regulation based on the average trading volume in the previous 30 trading sessions is a more reasonable practice.