THE Jamaica Stock Exchange (JSE) plans to introduce short selling later this year, enabling investors to sell stocks they do not own.

“We are waiting on the FSC [Financial Services Commission] to approve the rules,” said Marlene Street Forrest, managing director of the JSE, during a Jamaica Observer Business Forum earlier this month. The FSC, which regulates securities, insurance, pensions, and corporate services, is responsible for granting this approval.

Short selling allows investors to borrow shares from another party, sell them at a higher market price (eg, $2), and later repurchase them at a lower price (eg, $1). The investor then returns the shares to the lender and keeps the difference as profit.

The JSE has been promoting short selling since at least September 2022, when it hosted a workshop on the concept. In its 2023 annual report, the exchange indicated plans to introduce short selling by the second quarter of 2024 (April to June) but missed that timeline.

“We’re still working on short selling,” said Street Forrest when addressing the delay. “Let me just say, in terms of how long we have taken — we needed to take long. Market integrity is important.” She added that the JSE had carefully examined how short selling could impact Jamaica’s market.

“We conducted comprehensive research on global markets to understand their rules and disruptions during events like COVID-19,” she explained. “We also decided there would be no naked short selling and established guidelines for reporting short positions.”

Currently, investors on the JSE generate returns through capital gains and dividends. Capital gains occur when an investor buys a stock at a lower price and sells it at a higher price. For example, purchasing a stock at $1 and selling it at $2 results in a realised gain of $1. If the stock is held, the gain remains unrealised.

Short selling enables investors to profit from price declines, complementing traditional gains from rising prices. This strategy also allows the market to express sentiment about particular stocks. However, investors on the JSE are currently limited to profiting from long positions, which can be challenging during market downturns when buyer interest wanes.

To ensure fairness among market participants, the JSE has established a lending and borrowing bureau through its subsidiary, the Jamaica Central Securities Depository Limited (JCSD).

“That took some time,” Street Forrest noted. “But we have all the members of the brokers who were onboard to test that particular product or technology.”

The JCSD will facilitate short selling by acting as this bureau.

Not all stocks will be eligible for short selling due to limited availability. In Jamaica, certain stocks are tightly held, with less than 1-2 per cent available outside top shareholders such as directors or senior managers. This scarcity could make it difficult for investors to borrow shares for short selling.

Short selling carries significant risks compared to traditional investing. While losses for long positions are capped at the initial investment amount (eg, buying a stock for $1 means losing no more than $1), losses in short selling are theoretically unlimited if stock prices rise significantly. A “short squeeze”— when heavily shorted stocks experience sudden price surges — can exacerbate these risks by forcing short sellers to repurchase shares at inflated prices. High-profile examples include GameStop Corp and AMC Entertainment Holdings Inc, which saw dramatic price increases in January 2021 due to such squeezes.

In Jamaica’s context, limited free floats in certain stocks may reduce their eligibility for short selling altogether.

In markets like the United States, short selling is available only to investors with margin accounts that typically require minimum balances of US$2,000. Platforms like Interactive Brokers (IBKR) offer programmes allowing investors to lend shares for short selling in exchange for interest payments.

The JCSD’s establishment of a lending and borrowing bureau also creates new revenue opportunities for the JSE through secondary market activities. Andrae Tulloch, chief regulatory officer of the JSE, noted that JCSD services extend beyond short selling by enabling collateral lending.

Looking ahead, the JSE plans additional initiatives. It aims to introduce government securities trading in collaboration with the Bank of Jamaica by late 2025 and awaits FSC approval to trade digital assets through its brokers. However, digital currency trading is excluded from these plans.

“The environment is ready,” said Street Forrest regarding digital assets trading. “What now needs to happen is for our broker members to get FSC approval.” She clarified that digital assets would include items such as imaging rights for sports or musical artists rather than cryptocurrencies.