SEC tightens control over Short Selling - Program Trading

Measures to strengthen the supervision of short selling

Objective 1: To enhance the mechanisms for building trust and confidence in securities trading 

1.1  Enhancing the quality of securities eligible for short selling: non-SET 100 stocks will be eligible for short selling if they meet the market capitalization and turnover rules. 

1.2  Revising the trading rules of SET to limit the volatility of securities prices   

1.2.1  Impose the uptick rule when the closing price of any security has dropped 10 per cent or more from its closing price the previous day; 

1.2.2  Impose a daily short-selling limit on each eligible security; 

1.2.3  Disclose the daily short selling outstanding. 

Objective 2:  To prevent and deter the violation of short-selling rules (naked short-selling)

2.1  Enhancing oversight quality of intermediaries: 

2.1.1  Securities companies must proceed as follows:

Conduct Know Your Process (KYP) due diligence in cases where clients are intermediaries to inform them of the relevant rules and regulations and ensure their understanding to be able to communicate with their clients subsequently. This is to build confidence that intermediary clients have control systems in place to monitor compliance with relevant rules and regulations;  

Establish agreements with the clients to ensure compliance with relevant rules and regulations, including giving consent for securities companies to impose fines if the securities companies are required to pay fines due to the client’s failure to comply with the criteria. The securities companies are obligated to enforce these agreements;  

Implement order reception and transmission systems and screen orders through document verification to confirm that the clients have the securities as per their orders;

Establish post-trade monitoring systems to randomly inspect short/long selling transactions and report to the regulators promptly when any suspicious incident is detected. 

2.1.2  Develop a central system for securities companies to check securities; 

2.1.3  Increase fines on securities companies for breaching the short selling rules in line with international standards, e.g., naked short selling subject to a fine three times the amount of the profit (minimum 1 million baht), a transaction in breach of short selling rules is subject to a fine of up to 300,000 baht/time.

2.2  Amending legislation to increase liabilities throughout the chain: penalize investors who fail to comply with the short-selling rules and create a mechanism that identifies the ultimate beneficiary ownership  

2.3  Adding duties of gatekeeper (custodian): must inform the purposes of the transfer to verify the transactions. 

•    Guidelines to strengthen the supervision of the use of algorithmic trading (program trading) / high-frequency trading (HFT) 

Objective: To enhance the mechanisms for building trust and confidence in securities trading 

1.  Identifying identification of investors and auditability: Register HFT with the Stock Exchange of Thailand (SET) to enable tracking of their trading transactions. 

2.  Reviewing improper trading behaviors:  

2.1  Incorporate additional trading behaviours or patterns that affect market quantity and price;   

2.2  Develop a central order screening system;  

2.2  Impose a minimum order resting time for incoming orders before they can be cancelled to prevent improper trading orders (e.g., spoofing).

3.  Controlling price fluctuation:

3.1  Impose the dynamic price band mechanism, in addition to the ceiling and floor criteria, to suspend securities trading when the securities price increases or decreases 10 per cent from the latest price; 

3.2  Impose the auction trading method securities listed under market surveillance measures. 

4.  Preventing improper trading behaviors:  

4.1  Review sanctions on clients having improper trading behaviours;  

4.2  Disclose names of investors engaging in improper trading behaviours to all securities companies to take proper actions according to the guidelines. 

Previous Actions 

•    Convened meetings with the SET to examine suspicious transactions and discuss measures for overseeing short selling and program trading;  

•    Examined behaviours potentially indicative of naked short selling (selling more than buying or delivering borrowed securities without recording a short selling transaction (flag S) in the SET trading system by the SET rules). Currently, clarifications by securities companies and additional information verification are in process;    

•    Conducted further study and research on potential improper trading behaviours. Additional examination is underway; 

•    Collaborated with the SET, the Association of Thai Securities Companies (ASCO) and the Custodian Club to ensure that securities companies perform their duties with utmost care about short-selling transactions and the use of algorithmic trading; 

•    Studied international guidelines and discussed with Korean securities regulators regarding their imposed  measures and impacts;  

•    Convened meetings with the SET continuously regarding the strengthening of the SET measures related to short selling and program trading based on research studies conducted by leading consultants. 

Law and Regulations Governing Short Selling 

Current Law and Regulations

•    Securities and Exchange Act B.E. 2535 (1992) (SEA), Section 98(5) mandates that no securities company shall sell securities without having possession. 

•    The Notification issued by the Capital Market Supervisory Board regarding short selling stipulates that securities companies may offer short-selling services, provided that they must ensure their clients borrow the securities before placing orders. 

Proposed principle to amend the SEA

1.    Add a provision to impose penalties on non-compliance investors; 

2.    Set a mechanism to identify the ultimate beneficiary ownership.

Strengthening oversight of securities companies

Securities companies are required to: 

Conduct Know Your Process (KYP) on intermediary clients, to ensure that they understand the relevant rules and regulations and subsequently communicate with their clients accordingly as well as have in place control systems to monitor compliance with relevant rules and regulations;   

Establish agreements with clients to abide by the rules and consent to penalty enforcement, with the companies to enforce these agreements;

Implement order reception and transmission systems and conduct order screenings by verifying documents to confirm that clients have the securities as per their orders;  

Establish post-trade monitoring systems to randomly inspect short/long sell transactions and promptly report any suspicious incidents detected to regulators.