Economy, Business And Markets

Short Selling to Debut as Long-Awaited Instrument

Analyst at Securities & Exchange Organization
Short Selling to Debut as Long-Awaited Instrument
Short Selling to Debut as Long-Awaited Instrument

As marathon nuclear talks are making progress towards a final deal, investors’ optimism has sent domestic stock markets surging over the past two weeks, compensating for the benchmark’s long-standing downbeat trend. The long-term outlook of Iran’s capital market will be prosperous, if sanctions are lifted, but the short-term environment will be entirely sentimental as it takes companies some time to see the benefits of a sanctions-free business atmosphere in their financial statements. In the meantime, foreign and domestic Investors’ tendency toward Iran’s capital market can be enhanced by developing proper infrastructure in stock markets and employing new financial instruments for post-sanctions era. Many believe that an abrupt increase of the benchmarks may lead to overvalued domestic stocks, as witnessed in the winter of 2013 when the TEDPIX reached its all-time high, only to be followed by a sudden plunge. Short selling acts as an apt instrument to suit investors whenever they deem the market is in a bubble state.

Short selling means selling a security that is not owned by the seller and the seller has borrowed temporarily. It is motivated by the belief that a security's price will decline, enabling it to be bought back at a lower price to make a profit. Short selling may be prompted by speculation, or by the desire to hedge the downside risk of a long position in the same security or a related one. Theoretically short selling is highly risky and should only be used by experienced traders who take risks.

In bullish markets not only stock holders can benefit the trend but also those who suspect a bubble state can take short positions in order to gain profit when markets rebound. In fact, short selling allows investors to benefit from decrease in stock prices. It helps market participants to better evaluate securities and avoid buying barren overvalued stocks, while preventing stock price manipulation and uplifting. Market making on stocks won’t be prevalent without short selling, as seen with institutional investors in Iran who tend to be reluctant to embark on market making.

Short selling has long been demanded by domestic investors but there have been impediments to its implementation. Designing a model that is consistent with the conventional model, applicable in the trading system and at the same time conforms to Sharia law has been the biggest challenge. The Stock Exchange Organization of Iran lately declared that a new adaptive short selling model has been approved by SEO’s Sharia Board and that the implementation instruction has been delegated to Tehran Stock Exchange Technology Management Company. The new model has incorporated two implicit option contracts for the short selling parties to become in full compliance with Islamic laws. The market attitude toward this new modified instrument is unknown. Hopefully it will soon get up and running to please the investors.