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Securities Market
Regulated Short Selling

Updated: 15 March 2007

Definitions

1.

"short selling" or "short sale":-

(a)        subject to paragraph (b), means the sale of a security in respect of which the seller, or the person for whose benefit or on whose behalf the sale is made, has a presently exercisable and unconditional right to vest the security in the purchaser by virtue of having:-
 

(i)        under a securities borrowing and lending agreement:-

(A)       borrowed the securities; or

(B)       obtained a confirmation from the counterparty to the agreement that the counterparty has the security available to lend to him; 

(ii)        a title to other security which is convertible into or exchangeable for the security to which the sale relates;

(iii)       an option to acquire the security to which the sale relates;

(iv)       rights or warrants to subscribe to and to receive the security to which the sale relates; or

(v)        entered into with any other person an agreement or arrangement of a description prescribed by rules made under section 397 of the Securities and Futures Ordinance, for the purposes of this sub-paragraph;

 

(b)        in relation to a(ii), (iii), (iv) or (v) above, does not include a sale where the seller, or the person for whose benefit or on whose behalf the sale is made, has, at the time of the sale, issued unconditional instructions to obtain the security to which the sale relates.

 

2. Structured Product Hedging Short Selling means the short selling of an underlying stock of a single stock derivative warrant or single stock CBBC, which is conducted by a Structured Product Hedging Participant as part of a Structured Product Hedging Transaction. 

 

3. Structured Product Liquidity Provider Short Selling means the short selling of a Structured Product which is conducted as part of the activities for providing liquidity to an issue of Structured Product by a Structured Product Liquidity Provider.

 

4.

Designated Index Arbitrage Short Selling means the short selling of the underlying stocks of an index or indexes prescribed by the Exchange from time to time which is conducted by a Designated Index Arbitrage Short Selling Participant as part of a Designated Index Arbitrage Transaction. 

 

5. Options Hedging Short Selling means the short selling of an underlying stock of an Options Contract, which is conducted by a Market Maker or an Options Hedging Participant as part of an Options Hedging Transaction. 

 

6. Securities Market Maker Short Selling means the short selling of a security in the Pilot Program or a Designated Exchange Traded Fund which is conducted by a Securities Market Maker as part of its market making activities. 

 

7. Stock Futures Hedging Short Selling means the short selling of the underlying stocks of Stock Futures Contracts traded on the Hong Kong Futures Exchange Limited ("HKFE"), which is conducted by a Designated Stock Futures Hedging Short Selling Participant as part of a Stock Futures Hedging Transaction. 


Implementation

In line with reform of the securities borrowing and lending regime, the Exchange introduced a pilot scheme for regulated short selling in January 1994.   Under the pilot scheme, 17 securities could be short sold and a short sale could not be made below the best current ask price (the so-called "tick rule").   The scheme was revised in March 1996 with the number of designated securities for short selling increased and the tick rule abolished.  The tick rule was reinstated on 7 September 1998 upon changes in market conditions. 

The number of Designated Securities for short selling is revised on quarterly basis.  (A full list of Designated Securities is posted under "Designated Securities Eligible for Short Selling").  The selection criteria for Designated Securities are as follows:

  1. all constituent stocks of indices which are the underlying indices of equity index products traded on the Exchange;
     
  2. all constituent stocks of indices which are the underlying indices of equity index products traded on HKFE;
     
  3. all underlying stocks of stock options traded on the Exchange;
     
  4. all underlying stocks of Stock Futures Contracts (as defined in the rules, regulations and procedures of HKFE) traded on HKFE;
     
  5. stocks which maintain a public float capitalisation (i.e. stocks in the hands of the public as in Chapter 8 of the Main Board Listing Rules) of not less than HK$1 billion for either (i) a period of 60 consecutive trading days during which dealings in such stocks have not been suspended; or (ii) a period of no more than 70 consecutive trading days comprising 60 trading days during which dealings in such stocks have not been suspended;
     
  6.  stocks with market capitalisation of not less than HK$1 billion and an aggregate turnover during the preceding 12 months to market capitalisation ratio of not less than 40%;
     
  7. Tracker Fund of Hong Kong and other Exchange Traded Funds approved by the Board in consultation with the Commission;
     
  8. all securities traded under the Pilot Program;
     
  9. stocks that have been listed on the Exchange for not more than 60 trading days, with a public float capitalisation of not less than HK$10 billion for a period of 20 consecutive trading days commencing from the date of their listing on the Exchange and an aggregate turnover of not less than HK$200 million during such period; and
     
  10. all underlying stocks of Structured Product which is based on one single class of shares traded on the Exchange.
     

Major Requirements

With the exception of Securities Market Maker Short Selling by a Securities Market Maker or a Securities Market Maker for its Designated Specialist, Structured Product Liquidity Provider Short Selling by a Structured Product Liquidity Provider, Designated Index Arbitrage Short Selling by a Designated Index Arbitrage Short Selling Participant, Stock Futures Hedging Short Selling by a Designated Stock Futures Hedging Short Selling Participant, Structured Product Hedging Short Selling by a Structured Product Hedging Participant and Options Hedging Short Selling by a Market Maker or an Options Hedging Participant (please refer to Schedules 14, 15 and 17 of the Rules of the Exchange for details), the major requirements for Exchange Participants to participate in short selling are as follows:

  1. Exchange Participants who conduct short selling transaction must have the presently exercisable and unconditional right to vest the security in the purchaser;
     
  2. Short selling shall be limited to transactions in Designated Securities (as defined in the Eleventh Schedule to these Rules) effected on the Exchange during the Continuous Trading Session;
     
  3. Exchange Participants must, when inputting a short selling order into the AMS/3 system, indicate such matters and in such manner as the Exchange shall from time to time determine, that the order is a short selling order;
     
  4. Exchange Participants must follow the tick rule which stipulates that short sales of Designated Securities be made at prices not below the best current ask price except where the Designated Security is an Exchange Traded Fund traded under the Pilot Program or is an Exchange Traded Fund approved by the Commission to be excluded from the application of tick rule; and
     
  5. Exchange Participants engaged in short selling shall comply at all times with the Ordinance as amended from time to time, and the Regulations regarding short selling in the Eleventh Schedule to these Rules as approved by the Exchange from time to time.