Taiwan relaxes short-selling restrictions

New rules will allow traders to short stocks in the Taiwan Mid-Cap 100 index.
The Taiwan Stock Exchange is to increase the number of stocks that can be shorted from next week. Stock exchange chairman, Rong-I Wu, told FinanceAsia that shorting restrictions would be lifted on the 100 stocks that comprise the TSEC Taiwan Mid-Cap 100 Index and exchange traded funds.

Rong says the exchangeÆs regulator, the Financial Supervisory Commission (FSC), had already approved the regulation and short selling would be allowed once the stock exchange had changed its rules and made the necessary IT changes. This is expected next week.

ôBoth the government and the stock exchange favour these measures and believe this is what investors want. It will improve liquidity and contribute to the smoother functioning of the market,ö says Wu.

At present, short selling is confined to the components of the TSEC Taiwan 50 index, which comprises the biggest stocks by market capitalisation and accounts for almost 70% of the entire market. The Mid-Cap 100 accounts for about 20% of the exchangeÆs market capitalisation.

Shorting of the Taiwan 50 index has been permitted for the past two years. It is understood the exchange has been pressing the FSC to allow shorting on the Mid-Cap 100 index for more than two years.

While the deregulation will be welcomed by foreign investors, some are still irked by the rule that only allows a listed stock to rise or fall by up to 7% in one day.

Exchange officials say that the FSC maintains this rule because about 60% of market participants are retail investors and the rule provides those that trade on margin with the time to find the funds for further margin calls. Foreign investors on the other hand dislike the measure arguing that it effectively closes the market for these stocks.
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