As the dust settles and the GameStop share price plummets back towards earth it becomes evident there’s little chance of similar drama playing out in the South African market now or any time soon.
Not that there isn’t a large number of potential retail investors who wouldn’t like to ‘stick it’ to powerful institutional investors. But the fact is that although South Africa is ahead of many emerging markets when it comes to short-selling, the local market is not active or robust enough to support the type of frenzied trading that saw GameStop’s share price rocket from around $40 to just below $400 in less than a week.
And, crucially, there is almost no disclosure relating to the current limited level of short selling activity in South Africa. Frustratingly, judging by the response from the JSE and the Financial Sector Conduct Authority (FSCA), there is little hope of any improvement on this score in the short to medium term.
A related factor is that in general there’s limited retail investor activity in the local market.
Jean Pierre Verster, CEO of Protea Capital Management and one of the best-known, and most effective, short-sellers in the local market, reckons that at any time probably little more than 3-4% of the local market is short. Even if this is concentrated on 20 or so favourite stocks it means there is way too little activity to support the sort of dealing patterns that underpinned GameStop’s rise to global fame at the end of January.
“The hedge fund industry is South Africa is worth around R65 billion out of a total market of over R2 trillion, about 50% of that R65 billion would be short at any time,” explains Verster.
Hedging by shorting
He says investment banks providing loans to corporate executives secured by their shares would also account for a large chunk of short activity. The banks would hedge their loans by shorting the share. But even if this is added in, the level of short trading remains a small percentage of the total.
An additional factor inhibiting any kind of aggressive action similar to the GameStop drama is the lack of information around short positions on the JSE.
In the US the army of retail investors involved in trading in GameStop shares benefitted from knowing how many of the company’s shares had been shorted. In general, if this is a large percentage then it makes the sort of squeeze created by the buying activity of the retail investors much more effective. But if you have little idea of what the extent of the short position is, a GameStop-type play would be high-risk.
It’s difficult to know whether the non-existent level of disclosure on the JSE contributes to the limited shorting activity on the market or whether the poor level of disclosure is caused by the limited shorting activity. But the reality is there seems no rush to improve on disclosure with neither the JSE nor the FSCA planning to implement any sort of action in the near term.
‘Possible’ regulatory responses …
Occasionally the issue does bubble to the regulatory surface; recall back in September 2018 when the JSE issued a consultation paper with the catchy title ‘On possible regulatory responses to recent events surrounding listed issuers and trading in their shares’?
There were no fingers pointed directly at Steinhoff, Tongaat or Iqbal Surve’s Sagarmatha but most knew who was behind the ‘recent events’.
“The South African financial markets have, over the past year, been shaken by a range of corporate scandals, rumours and innuendo,” explained the JSE in the introduction to its 2018 consultation paper.
These unsettling events led to questions about how certain alleged activities were able to happen and, said the document: “Whether regulators such as the JSE could have taken action to prevent certain activities and whether those events have highlighted any regulatory provisions that might need to change.”
There was a passing reference to concerns about the impact of short selling, which had contributed to the dramatic slump in the Steinhoff share price.
While the JSE noted that short selling is a legitimate form of market activity and plays an important role in the price formation process, it questioned whether some level of disclosure of short sale positions might be appropriate. “Information on short positions enable investors to make better risk assessments when investing and allows regulators to perform their market surveillance and market abuse investigations function more effectively,” said the JSE.
It referred to the FSCA’s decision to implement a short sale disclosure regime: “Whereby information on short sales of listed securities is provided to the investing public and the regulators.” The JSE said it was strongly supportive of this initiative.
This week the JSE confirmed to Moneyweb that it does not have the regulatory power to enforce the appropriate disclosure.
“Short positions would need to be disclosed by the investors who hold those positions. The JSE only has regulatory jurisdiction over its member firms so it is unable to impose a regulatory requirement on investors,” said Shaun Davies, director of market regulation at the JSE.
What’s on the cards
Two months after the release of the JSE’s September 2018 consultation document, the FSCA released a discussion paper on the implementation of a short sale reporting and disclosure framework. On the cards appear to be measures that would bring SA into line with leading international markets including the flagging of trades as shorts where appropriate. This would allow the JSE to publish aggregate short-interest data for each listed company.
Currently JSE trades are only flagged as a buy or a sell.
In addition, the FSCA paper alludes to the requirement in some markets that individual parties with a short position equivalent to 1% or more of the outstanding equity in a company disclose that position. This is similar to, although puzzlingly more onerous than, the obligation by investors with a 5% long position to disclose that.
More consultation …
Asked for an update on the 2018 discussion paper Jurgen Boyd, divisional executive, market integrity at the FSCA told Moneyweb this week: “The FSCA has considered the extensive comments received and is currently preparing, for publication, a position paper in response thereto, following which a conduct standard will be drafted and published as part of the consultation process.” So, no rush there.
Currently traders with access to the large brokers who do the scrip lending required by short sellers (uncovered short sales are prohibited in South Africa and most markets) can get some indication of the short position in individual shares, and Bloomberg compiles statistics, but these are at best no more than indicative.
Verster welcomes the prospect of better aggregate short-interest disclosure, which he believes will assist most market participants and reduce the risk.
Meanwhile, the JSE could use the limited power at its disposal to ensure better disclosure of derivative trading due to executives who use their shares as security for bank loans.
All in all, there’s very little chance of something like the GameStop drama playing out on the local stage for the foreseeable future.