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Home > Media Reiews > News Review Last Updated: 14:52 03/09/2007
News Review #55: August 8, 2002

Tokyo unveils new curbs on short-selling

Reviewed By Hitoshi URABE

"Tokyo unveils new curbs on short-selling",1870,136127,00.html?
(by Reuters, AFP) Straits Times


There is nothing wrong with short selling, which is making a contract to sell certain stock not in possession of it. It is done around the world for various goods, be it stocks, bonds, currencies, oil, pork corn, rice, wine, tulip bulbs, or what have you. Also there are various styles of trading, such as buying and selling of actual stuff, forward contracts for settlements later, futures that do not expect actual deliveries, options where buying and selling of items are indirect, and then the variety of means of hedging utilizing a multiple number of different markets and techniques.

Such are the dynamics of the market people have learned and acquired through the ages, making the flow of goods and money ever more efficient, effectively adding value, and making people happier. This is not to say a naive and barbarian style of free market, the rule of the jungle, is the best. Some rules are actually necessary and desirable to benefit from the virtue of market mechanism. Nevertheless, the rules must be limited so as for the traders to exercise prudence, and never to restrain legitimate trading and creative will of the participants. Illicit actions must be condemned but assessments of the market must be free and be honored.

It was early this spring the authorities banned certain types of short selling to boost stock prices. At the time, there were some welcoming voices for the new regulation as many companies were desperate to devise good-looking fiscal-end figures and were anticipating higher stock prices. Even then, though, there were views expressing anxieties, as the rule was deemed to disrupt the market by testing the participants' thoughts instead of their prudence, thus risking the confidence in the market.

And, as the article reports, they have done it again. The authorities have announced a further restriction on short selling will be put in place from this September.

What could happen may be envisaged by looking at what has occurred recently in the foreign exchange market. Seeing yen to appreciate significantly during the past few weeks, the authorities "asked" major traders to report to them the details of the trading, especially such matters as who are behind large volume transactions. Their intention was fairly obvious, to discourage buying yen speculatively in order for it not to surge. The reporting was not mandatory, at least in a legal sense, but in reality it would have been difficult for the major players to flatly reject the request of the authorities. The outcome so far has not been the hoped for depreciation of yen, but a significant drop in trading volume in the Tokyo market, to the levels of after the incident of September 11 last year. What happened apparently was that the people shifted their trading to other markets such as Singapore and Hong Kong where poking eyes of Japanese authorities could be avoided.

Restriction on short selling, or on any type of trade for that matter, would have a discouraging effect to active trading. Even if a rule is recognized as reasonable, an overdose could immobilize the market.

Government officials were also reported to have commented that the new regulation is a part of the package intended to make the stock market safe and attractive so as to induce more individuals to participate in it. People should be aware, though, as what may seem like a safe and comfortable place at first in reality could be a cage, just as a baby in a crib would initially recognizes it as a safe shelter only to find out eventually that it is actually a means of confinement.

It will be a bad joke if by the time the market were shaped to suit the taste of the authorities, there would be no one to trade in it, as the market will have become so unattractive to participate.

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