Thailand's Stance Against Naked Short Selling: A Strategic Move Amidst Uncertainties

Thailand has taken a decisive stand against naked short selling. This measure, aimed at stabilizing the Thai stock market, comes amid growing concerns over the role of foreign investors in short-selling activities.

Understanding Short Selling and Naked Short Selling

In essence, short selling is a bet against a stock where investors sell stocks they do not own, anticipating a price decline. Once the price falls, they repurchase the stock at a lower cost, pocketing the difference. Naked short selling is a more aggressive tactic where investors sell stocks they haven't borrowed or don't own. It's often viewed as a riskier and more speculative practice.

Thailand's Proactive Response to Market Speculation

Pakorn Peetathawatchai, the chairman of the Stock Exchange of Thailand (SET), points out that a substantial portion of short-selling transactions in Thailand is conducted by foreign investors, primarily involving large-cap stocks in the SET50 index. In the first two weeks of November alone, foreign investors sold off Thai stocks worth 7 billion baht, bringing the year's net sales to a staggering 180 billion baht.

The Thai SEC's measures are not about imposing a blanket ban on short selling but rather targeting the more speculative practice of naked short selling, which aims to maintain market integrity without stifling legitimate trading practices. Kittiratt Na-Ranong, former deputy prime minister and finance minister, emphasized that tackling naked short selling is part of boosting investor faith.

South Korea's Experience

On 5 November, the South Korean securities regulatory authority issued a ban prohibiting investors from shorting stocks in the KOSPI and KOSDAQ indices until the end of June 2024. Following the announcement, the Korean composite index saw a significant increase of 5.66% the very next day, while the KOSDAQ index recorded a single-day gain of 7.34% — the highest growth in three years. However, the following days saw a decline in both indices, ultimately negating the gains made initially.

Will These Measures Steer the SET Back on Course?

The SET index has plummeted more than 10% since the year's start. While measures against naked short selling are a positive step for market integrity, they alone are unlikely to reverse the structural headwinds facing the Thai market — including slowing domestic growth, political uncertainty, and weaker export demand. Sustained recovery will require a broader improvement in macroeconomic fundamentals and foreign investor confidence in Thailand's regulatory environment.