Regulators to take steps against short selling Canada is making changes to curb the practice of predatory short selling, a thorn in the side
of junior companies
April 23, 2021
Some excerpts ...
The Ontario taskforce didn’t recommend bringing back the tick test, but it did propose other substantial changes, including requiring shorters to confirm they can borrow the securities they’re attempting to short, and be subject to a mandatory buy-in if a sale fails to settle two days after the settlement date, or four days after the trading date.
The change would effectively end a practice known as naked shorting. Currently, short sellers are only required to have a “reasonable expectation” of settling a short trade, meaning they can short without actually having borrowed the stock – something that can be disruptive if the shorter cannot locate stock to buy back, creating more shares than actually exist in the market. Transactions must be settled in two days, but investors can have up to 10 days in exceptional circumstances.
According to Lynch, hedge funds have exploited the current loopholes by shifting uncovered bets to another company on day 11, extending their time to short. The taskforce proposal, he said, “would eliminate kiting and that would be helpful to stop predatory shorts. If those [recommendations] are put in, we’ll have a good correction in the marketplace.”
Lynch said he is optimistic about the taskforce’s recommendations, but added that the implementation will be key. “Soft implementation won’t be any good. Implementation with teeth would require some skill, but it could be very effective.”