NSE to Boost its Liquidity via Short-Selling of Stocks

The Government through the National Treasury has allowed the Nairobi Securities Exchange (NSE) to introduce short-selling, aimed at boosting liquidity at the exchange and attracting more investors.

Through gazette notice, the National Treasury Cabinet Secretary Henry Rotich changed its market regulations authorising stock lending and short selling, but restricted their adoption by limiting them to licensed market participants.

Under the new regulation, one will be able to borrow or lend securities to other market participants at agreed terms.

The Capital Markets (Securities Lending, Borrowing and Short-Selling) Regulations, 2017  will increase the market liquidity and flexibility of financing.

“Making the Kenyan capital markets highly vibrant and liquid is a key priority for the capital markets industry and the Securities Lending, Borrowing and Short-Selling Regulations are expected to facilitate this,” said Paul Muthaura, Chief Executive of CMA.

According to Geoffrey Odundo chief executive NSE, the move to allow short-selling will help the market increase its turnover ratio to 15 percent from 6 percent currently.

What is Short selling

Short selling: you borrow a stock, sell the stock, and then buy the stock back to return it to the lender.

According to economic Times, Short-selling is considered an essential feature of the securities market not just for providing liquidity, but also for helping price corrections in overvalued stocks.

Supporters of short-selling claim its absence distort efficient price discovery, gives promoters the unfettered freedom to manipulate prices and favours manipulators than rational investors.