Lingering shadow of short selling

SHORT selling has long been a contentious feature of capital markets, balancing between its function as a price discovery mechanism and its potential to distort sentiment.

In Malaysia, where liquidity and investor depth remain relatively limited compared to more developed markets, the presence of aggressive short sellers often amplifies volatility in ways that companies argue are divorced from their fundamentals.

For instance, investors on Bursa Malaysia were left reeling as 18 counters were slapped with intraday short-selling suspensions on April 7, after their share prices plunged past regulatory thresholds.

The trigger was heavy selling pressure that saw some fundamentally strong stocks sink by double digits in a single session.

Eight of the hardest hit were from the technology sector, including names that had been riding high on optimism about Malaysia’s place in the semiconductor supply chain.

UWC Bhd tumbled as much as 21.1% to RM1.57, while Inari Amertron Bhd shed more than 20% to RM1.50. The Bursa Malaysia Technology Index slumped 13.6% in a single day.

Energy counters too were caught in the storm, with Dialog Group Bhd plunging over 16%, Yinson Holdings Bhd down 16.7% while Hibiscus Petroleum Bhd lost 18 sen to RM1.45.

The sell-off was exacerbated by fears of escalating global trade tensions, particularly renewed concerns that semiconductor players could be dragged into the US-China tariff battle.

But for many retail investors watching counters with strong fundamentals nosedive in a matter of hours, they believe the main culprit was short-selling activities.

Bursa Malaysia, however, has been quick to stress that short selling is neither unregulated nor inherently harmful.

Asked if regulators should consider stricter circuit-breakers or staggered down-ticks, the exchange maintains: “Short selling is a legitimate and regulated practice in Malaysia, consistent with global market standards. It plays an important role in enhancing liquidity and fair price discovery.

“Bursa Malaysia prohibits naked short selling and enforces a comprehensive framework of safeguards designed to prevent market abuse vital in upholding the integrity and orderly conduct of our capital market.”

The exchange also highlights that gross short positions are capped at 3% of listed shares and that circuit breakers, price and volume limits, as well as the tick rule are already in place.

It adds that the exchange is equipped with advanced capabilities to detect irregular or potentially manipulative trading activity.

There are also calls for the authorities to cap the interest on securities borrowing and lending (SBL) arrangements.

However, Bursa believes that imposing a ceiling on SBL interest could disrupt this market-driven pricing mechanism and reduce flexibility for participants.

“Instead, Bursa Malaysia emphasises transparency and oversight of SBL transactions, alongside strict eligibility criteria for approved securities, to ensure that short selling remains a legitimate tool for liquidity provision and risk management.

“In Singapore Exchange, fixed borrowing rates of up to 6% once deterred activity, prompting a shift to variable pricing models that better reflect real-time supply demand conditions and enhance liquidity,” it explains.

Compared to regional peers, Bursa argues, Malaysia’s short-selling regime is among the most tightly regulated.

Still, for retail investors who bore the brunt of the recent rout, assurances of regulatory safeguards often ring hollow when double-digit losses unfold in real time.

The view from the ground

Affected corporates argue that companies with high liquidity but no controlling shareholder are particularly vulnerable to short sellers, who can more easily move prices without fear of an anchor shareholder stepping in to absorb selling pressure.

The tactics are familiar. Short sellers typically target perceived vulnerabilities – macroeconomic events, weak quarterly earnings, analyst downgrades, or market rumours – and magnify them to erode confidence.

A Bursa-listed company notes that even when it publishes correct information or positive operational updates, these may not be enough to counter a determined short attack.

Monitoring daily net short positions has become part of its routine risk surveillance, with management keeping a close eye on unusual sell queues during option closing periods to detect artificial downward pressure.

Yet, company executives also stress that their best defence lies in fundamentals.

Kelvin Loh, interim group chief executive officer of CTOS Digital Bhd, which saw Bursa Malaysia suspending short selling for the counter after its share price fell more than 15% in March, says it is not aware of any specific narratives circulated by short sellers.

“Our focus remains on the fundamentals of the business. We regularly engage with the investment community to provide updates and ensure open communication,” he tells StarBiz 7.

On the question of governance and financial integrity, CTOS and other affected corporates highlight their reliance on rigorous audit processes.

CTOS points to multiple layers of oversight, from annual statutory audits by external auditors to internal audit reviews reporting directly to its audit and risk committee and the board, as well as yearly assessments by the credit reporting agency (CRA) registrar under the Finance Ministry.

The issue, however, is not merely about disclosure. It is about perception.

Boards may take the view that short selling is part of the broader market mechanism – as CTOS does – but they also acknowledge the reputational drag it creates.

As the affected company observed, when share price declines are inconsistent with a company’s operational performance, investors may become reluctant to reinvest, no matter how compelling the fundamentals.

Investor communication, therefore, becomes both defence and necessity.

CTOS says it continually reviews its disclosure practices, maintaining regular engagement with both local and foreign institutional investors.

“Consistent, fact-based communication is the most effective way to counter misinformation,” Loh says, adding that the company is preparing a strong pipeline of product rollouts while driving efficiency through cost optimisation and automation.

The other affected corporate shares that despite enhanced disclosures, rebuilding trust is especially difficult for investors who have already exited at a loss.

Once confidence has been shaken, the willingness to re-enter becomes limited.

On capital management, CTOS has signalled its confidence through active share buybacks in recent weeks, believing its shares to be undervalued.

Loh says the group’s capital management is guided by disciplined financial priorities, with dividends and other measures evaluated in line with market conditions and shareholder interests.

Other corporates are more cautious, pointing out that defending against heavy selling through buybacks is rarely sustainable, as it diverts funds from growth initiatives.

Ultimately, both CTOS and other corporates argue that consistent business execution is their most powerful reputational safeguard.

“Consistency in business performance is key.

“We are doubling down on our growth strategies and strengthening our footprint as Malaysia’s leading CRA with a growing regional presence,” Loh adds.

But there remains an uncomfortable truth: companies can only do so much.

Beyond fundamentals and governance, much depends on the integrity of the trading environment itself.

As one corporate executive puts it, “once ‘shorted’, twice shy.”

Restoring investor confidence, therefore, is not just about company performance, but also about ensuring that Malaysia’s capital markets are seen as fair and transparent arenas for investment.