The latest SEBI short-selling regulations are undoubtedly a double-edged sword. These are: No institutional investor shall be let to do day trading or compete their trades intra-day, said the market regulator. Short selling means selling a stock that the seller does not own at the time of trade. SEBI also declared all stocks that trade in the futures and recourse segments are privileged for short-selling.
The declared objective of curbing market manipulation and enhancing price spotting stands laudable. Their available opportunity to saturate market efficiency should not be overlooked. With every regulation worth its stiff structure slipping into methods that purposely propelled the concept of good preference to its very extensive limitations.
Limiting short selling, particularly naked shorting, can hamper liquidity, especially in smaller stocks. This could make the market less responsive to basically fundamental shifts, potentially hurting price discovery.
However, there is a need not to forget the rationale behind SEBI’s action. The recent memory of volatile episodes, potentially exacerbated by manipulative short selling, likely played a role.
Additionally, a profound concern for retail investor protection might have factored in, as short selling can be complicated and efficiently misunderstood. Therefore, it remains a bit crucial to monitor the impact of these new guidelines closely. We need to see if the benefits of curbing manipulation outweigh the potential cost of reduced market efficiency.
What a Fund Manager at Wright Research said was the data-driven approach, with periodic assessment and adjustments, would be key to guaranteeing a wholesome balance between stability and dynamism.