After a wait of nearly two years, Securities and Exchange Board of India (Sebi) today gave its green signal to allow short sales - sale of a stock that a seller does not own at the time of trade - for all class of investors.
The capital market regulator also announced the broad framework for the Securities Lending and Borrowing (SLB) scheme.
Sebi said stock exchanges shall put in place a full fledged securities lending and borrowing (SLB) scheme, which, to begin with, shall be operated through clearing corporation/clearing house of stock exchanges having nationwide terminals who will be registered as Approved Intermediaries (AIs) under Securities Lending Scheme, 1997 (SLS, 1997).
"The SLB shall take place on an automated, screen-based, order-matching platform, which will be provided by the AIs. This platform shall be independent of the other trading platforms,"Sebi said in a release issued today.
All shares in the futures and options (F&O) segment will be eligible for short selling. Currently, there are 200-odd stocks available in F&O on the National Stock Exchange. Sebi said it will review the list of stocks that are eligible for short selling transactions from time to time.
The tenure of lending/borrowing shall be fixed as standardised contracts, and, to start with, contracts with tenure of seven trading days is likely to be introduced.
"The settlement cycle for SLB transactions shall be on T+1 basis. The settlement of lending and borrowing transactions shall be independent of normal market settlement.
"The settlement of the lending and borrowing transactions shall be done on a gross basis at the level of the clients i.e. no netting of transactions at any level will be permitted," the release said.
Sebi, which first invited comments from market players on short sales in January 2006, however, did not specify any date for implementation saying it will inform the date later after stock exchanges and depositories put in place fool-proof systems.
Some of the features of the short selling rules include a ban on naked short selling - meaning all investors would be required to mandatorily honour their obligation of delivering the securities at the time of settlement (using the SLB scheme). No institutional investor will be allowed to do day trading - virtually prohibiting squaring-off of their transactions intra-day.
At present, there is no prohibition on short selling by retail investors. Institutional investors, viz., foreign institutional investors, mutual funds, banks and insurance companies, are prohibited from short selling under different regulations, and are currently required to settle trades on delivery basis in the cash markets.
Short selling by institutions, which was banned in early 2001 following the Ketan Parekh-scam when stock prices plunged, is regarded by experts as an essential and desirable requirement for a vibrant securities market.
Restrictions on short-selling, according to its votaries, distorts efficient price discovery. By allowing short selling, the market will have much-needed liquidity and help corrections in over-valued stocks.
Understanding Short Term Trading
Before I begin, this blog is not for intraday traders. My definition of short term implies duration of around 2 to 3 months.
Short Term stock picking is no rocket science, but rather a visual interpretation of technical charts. A basic moving average on a time frame chart will show the direction of the securities movement.
Moving averages is a mathematical results calculated by averaging a number of past data points. Moving averages (MA) in it's basic form is calculated by taking the arithmetic mean of a given set of values on a rolling window of timeframe. Once the value of MA has been calculated, they are plotted onto a chart and then connected to create a moving average line. Typical moving averages used for short term trading are 50 MA and 100 MA.
Types of Moving Averages
1) Simple Moving Average (SMA)
SMA is calculated by taking the arithmetic mean of a given set of values on a rolling window of timeframe. The usefulness of the SMA is limited because each point in the data series is weighted the same, regardless of where it occurs in the sequence. Critics argue that the most recent data is more significant than the older data and should have a greater influence on the final result.
2) Exponential Moving Average (EMA)
EMA overcomes the limits of SMA, where more weight is given to the recent prices in an attempt to make it more responsive to new information. When calculating the first point of the EMA, we may notice that there is no value available to use as the previous EMA. This small problem can be solved by starting the calculation with a simple moving average and continuing on with calculating the EMA.
The primary functions of a moving average is to identify trends and reversals, measure the strength of an asset's momentum and determine potential areas where an asset will find support or resistance. Moving averages are lagging indicator, which means they do not predict new trend, but confirm trends once they have been established.
A stock is deemed to be in an uptrend when the price is above a moving average and the average is sloping upward. Conversely, a trader will use a price below a downward sloping average to confirm a downtrend. Many traders will only consider holding a long position in an asset when the price is trading above a moving average.
In general, short-term momentum can be gauged by looking at moving averages that focus on time periods of 50 days or less. Looking at moving averages that are created with a period of 50 to 100 days is generally regarded as a good measure of medium-term momentum. Finally, any moving average that uses 100 days or more in the calculation can be used as a measure of long-term momentum.
Support, resistence and stoploss can be infered by referring the closet MA below or above the market price. The other factor that is used in short term momentum is the trading volume. The moving averages along with the trading volume can provide a better insight to short term movement.
Markets are moved by their largest participants - I believe this is the single most important principle in short-term trading. Accordingly, I track the presence of large traders by determining how much volume is in the market and how that compares to average. Because volume correlates very highly with volatility, the market's relative volume helps you determine the amount of movement likely at any given time frame--and it helps you handicap the odds of trending vs. remaining slow and range bound.
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