Short selling

In simple term, short selling is the sale of a stock that the investor does not currently own but has a presently exercisable and unconditional right to transfer ownership of the securities to the investor. This right may come from borrowing the stock from an intermediary, such as a brokerage or a bank.

At present, only stocks specified by the Stock Exchange of Hong Kong (SEHK) as Designated Securities Eligible For Short Selling can be sold short.

Investors may engage in a stock borrowing and lending arrangement with an intermediary to obtain the stock for short selling purpose. Investors need to open a short selling account and establish a valid stock borrowing and lending agreement with the intermediary. This arrangement ensures that once the short sale is executed, investors possess the required rights to the stock and can meet settlement obligations by T+2.

As a risk management measure, the brokerage requires clients to provide collateral of at least 105% of the market value of the borrowed stock. Investors should read the stock borrowing and lending agreement carefully to understand the required deposit, applicable interest, and the associated risks, including the risk of margin calls by the intermediary to maintain the collateral level.

When placing a short selling order, investors must specify to the intermediary that the order is a short selling order and confirm that a stock borrowing and lending agreement is in place. Short sales can only be executed through the SEHK’s securities trading platform system and cannot be made below the best current ask price.

Hong Kong laws prohibit any individual from selling stocks that they do not own. Some investors mistakenly believe that repurchasing the sold stocks within the same day qualifies as legal short selling, but this is not the case at all. Engaging in short selling without first setting up a proper stock borrowing and lending arrangement could result in a violation of the law.