The Philippine Stock Exchange building (PSE Plaza), Ayala Land’s Tower One, in Makati, a suburb of the capital Manila. Image Credit: Reuters

Manila: Who is to say that the stock price of global foods giant Jollibee, developer Ayala Land, Globe Telecom, carrier PAL, construction firm DMCI, internet giant PLDT and others are overvalued and undervalued?

Are they heading for an downward or upward movement? It turns out an informed guess is possible.

Market researchers constantly cruch the numbers to know where each company's stock price stands, for example by knowing the price-earnings ratio. Some, who have a good grasp of market trends, grab the opportunity and profit from an uptick in price.

Now, the Philippine regulators have introduced "short-selling", allowing investors to bet against Manila-listed shares, and profit when their share prices actually go down.

This moves is decades in the making.

The Philippine Stock Exchange (PSE), one of Asia's oldest exchanges, started allowing short-selling of stocks on Monday (November 6), a full 27 years after the exchange first proposed to allow short selling. It came following years of regulatory hurdles amid concerns about potential market volatility it may unleash.

While already established in other Asian markets, the Philippines' plan was tentatively approved in 2010 and finally gained approval for revised guidelines in 2018. In 2020, pandemic delayed efforts to launch short-selling. Necessary approvals were obtained this year.

What is short-selling?

Short-selling involves making money when a stock's price decline. This trading strategy involves selling an asset (stocks), that the seller does not own at the time of the sale.

Stock shorting
Image Credit: Vijith Pulikkal | Gulf News

Instead, the seller borrows the asset with the expectation that its price will decline, allowing them to buy it back later at a lower price.

Investors engaged in short-selling borrow shares, sell them at one price, and buy the same number of shares at a lower price later to return them to the lender.

$ 273.8 b

Philippines market capitalisation in October 2023 (Source: CIEC data), down from $293.234b in September 2023

Why is it called “shorting”?

In capital markets, shorting (short for “short selling”) is known as a short position — in which an investor essentially plays against the market, profiting when share prices fall.

Stock investing is all about the clash of theses, based on fundamental or technical research or a combination of the two. Research can go deep and wide. To short-sell is to take the thesis that a stock will fall, based on some fundamental factors borne out by fundamentals, market research or pure hunch.

What was the hurdle for short-selling at PSE?

The implementation of a securities borrowing and lending (SBL) programme was a key hurdle, with offshore collateral acceptance and approval of a lending agent contributing to its success.

Securities Borrowing and Lending (SBL)
The SBL programme is a financial arrangement that permits investors — typically institutional ones like mutual funds, pension funds, or hedge funds — to borrow securities for a specific duration.

In this arrangement, the lending party, often an institutional investor holding a portfolio of securities, consents to lend securities to a borrower, usually in return for a fee or interest payment.

Subsequently, the borrower can utilise the borrowed securities for diverse purposes, including short-selling, covering a short position, or fulfilling settlement obligations.

What happens next

Companies listed on the Philippines Stock Exchange (PSE) Index, can be shorted, along with exchange-traded funds and shares in midcap and dividend yield indexes.

Some investment analysts view this new trading regime as the culmination of an endeavour that has been years in the making.

They see it as a positive development that would help “deepen" the market, improve price discovery, and make it more appealing to a broader pool of investors.

A woman walks through the lobby of the Philippine Stock Exchange tower in Bonifacio Global City (BGC), Metro Manila, the Philippines. Image Credit: Bloomberg

Morever, it brings the Philippines a step closer to developed markets where short-selling is widely adopted.

While some see the move as a potential boost to the Philippines' market liquidity, others emphasise the importance of listed companies improving transparency in their activities.

When is short-selling profitable?

Investors using this strategy have seen success in betting against companies facing scandals or overvaluation, especially in the US.

The Philippine corporate sector's governance issues, highlighted in a 2021 Asian Development Bank report, add an additional layer of caution.

What are the limits on short-selling in the Philippines?

While the PSE Index has declined over 9 per cent this year, the new short-selling rules come with limitations — including restrictions on the number of shares that can be shorted at any one time and an "uptick rule" to prevent aggressive selling.

Manila Airport NAIA terminal 3 Ninoy Aquino International Airport
ECONOMIC TAKEOFF: Fitch predicted in October the Philippine economy will grow 5.3% in 2023, and 6.6% in 2024. A view of the Manila international airport's T3.

What is an uptick rule?

The uptick rule is a regulation designed to prevent short sellers from adding to the downward momentum of a declining stock by only allowing short sales on an uptick or a zero-plus tick.

In other words, it restricts short-selling to situations where the last trade price was higher than the previous price.

Here’s how the uptick rule generally works: Under the traditional uptick rule, a short sale can only be executed if the last trade price was higher than the previous trade price — an uptick. This is intended to prevent short sellers from continuously driving down the price of a stock that is already in a decline.

A bit of look back on "tick test” rules: In the United States, the uptick rule was implemented as part of the Securities Exchange Act of 1934. Over the years, the rules related to short-selling, including the uptick rule, underwent various changes.

The original uptick rule was abolished in 2007, but in response to the 2008 financial crisis, the US Securities and Exchange Commission (SEC) reinstated a modified version of the rule in 2010.

What is “zero-plus tick”?

If a stock is trading at the same price as the previous trade (a zero-plus tick), the short sale can still be executed. This provision allows short selling in a flat market but restricts short selling on a downtick.

What is the “modified uptick rule”?

It is also known as the alternative uptick rule. The modified uptick rule requires that short sales be executed on an uptick or a zero-plus tick — but it is more flexible than the original rule.

In the US, the modified uptick rule adopted by the market regulator applies only to individual stocks in the market and includes a “circuit breaker” that temporarily halts short-selling in a particular stock if its price declines by a certain percentage in a single day.

What are the addvantages of the uptick rule?

Proponents of the uptick rule argue that it helps stabilise markets during periods of rapid declines by slowing the pace of short selling. Critics, on the other hand, contend that it interferes with market efficiency and price discovery.

Different countries may have different rules regarding short-selling, and regulatory measures can change over time based on market conditions and regulatory considerations.

What happens next?

It's early days. Philippine shares market stakeholders are keenly watching how investors adapt to the expanded regime. The full benefits of short-selling depend on widespread understanding and adoption across different stakeholders in the local market.

The challenge lies in making brokers comfortable with the new trades and educating investors about the nuances, risks and rewards of short-selling.


Some ways in which short-selling can help the market:
• Price discovery: Short-selling aids in effective price discovery by enabling investors to convey bearish sentiments about a stock or another financial instrument. Acting on research or information signaling overvaluation, short-sellers play a role in bringing prices into closer alignment with the true value of a security.

• Liquidity: Short-selling adds liquidity to the market. By allowing investors to sell a security without owning it, short-selling increases the number of potential sellers, improving market liquidity. This liquidity benefits all market participants by reducing bid-ask spreads and making it easier to buy or sell securities.

• Risk management: Short-selling provides a tool for risk management. Investors can use short-selling to hedge their long positions, mitigating potential losses during market downturns. This ability to manage risk more effectively can attract a broader range of investors to the market.

• Market efficiency: Short-selling contributes to market efficiency by encouraging the incorporation of all available information into stock prices. The threat of short-selling encourages market participants to thoroughly analyze and disclose relevant information, leading to more accurate pricing of securities.

• Discipline for overvalued stocks: Short-sellers act as a check on market exuberance by identifying and capitalising on overvalued stocks. When a stock is overpriced, short-sellers can take positions to profit from its eventual decline, helping to prevent speculative bubbles and promoting market stability.

• Capital allocation: It can help redirect capital to more productive uses. When short-sellers identify weaknesses in a company or sector, capital can be reallocated to more promising opportunities, fostering efficient capital allocation across the market.

• Market stability: While short-selling is often associated with market speculation, it can also contribute to stability. Short-sellers provide a counterbalance to optimistic market sentiment, helping prevent excessive price inflation and potential market bubbles.

• Increased market participation: The availability of short-selling can attract a wider range of investors, including those who seek to profit from declining prices. This diversity of participants adds depth and resilience to the market, making it more robust.