The Nigerian Stock Exchange has said that market operators and stockbroking firms are not to be involved in naked short selling in the capital market.

The NSE said that on commencement of the process, only registered market makers would be allowed to undertake naked short selling in the market.

The information which was posted on the NSE website on Thursday, said that it was important for dealing members of the NSE to face their business, and allow market makers, to handle other core areas.

Naked short selling or naked shorting is a practice of short-selling a financial instrument without first borrowing the security or ensuring that the security can be borrowed, as is conventionally done in short selling.

According to the NSE, in naked short selling, when the seller does not obtain the shares within the required time frame, the result is known as a ‘fail to deliver’, and the transaction generally remains open until the shares are acquired by the seller, or the seller’s broker settles the trade.

The NSE noted that this type of transaction, which is an advanced form of short selling, is used to anticipate a price fall, but exposes the seller to the risk of a price rise.

It however, noted that short selling involved the selling of a security that the seller did not own, or any sale that was completed by the delivery of a security borrowed by the seller.

The NSE said, that in short selling, the investor usually aimed to profit from an anticipated drop in the price of a commodity, financial instrument, or security, either by borrowing and selling it at present, or by selling a firm promise (futures contract) to deliver it on a later date at the current or a specified price.

The statement said, “Thus, market makers must sell a security to a buyer even when there are temporary shortages of that security available in the market, this may occur, for example, if there is a sudden surge in buying interest in that security, or if few investors are selling the security at that time.

“Because it may take a market maker considerable time to arrange to borrow the security, a market maker engaged in bona fide market making, particularly in a fast –moving market, may need to sell the security short without having arranged to borrow shares. This is especially true for market makers in thinly traded, illiquid stocks.”

The Chief Executive Officer, NSE, Mr. Oscar Onyema, noted that the NSE was already collaborating with stakeholders to ensure a smooth take off of short selling and securities lending.

Source: Punch/Udeme Ekwere