This archive report was first published on 30 October 2019.
On October 30, 2019, the Capital Markets Authority (CMA) issued a stern warning to stockbrokers regarding the practice of 'naked' short selling.
According to the CMA, stockbrokers are responsible for ensuring that their clients have the necessary shares or funds to complete deals. Failure to do so will result in penalties.
The CMA's warning comes in response to complaints from brokers that the new Nairobi Securities Exchange (NSE) platform removed a system that verified whether a trader had the actual shares they were short selling.
However, the CMA maintains that the current legal and regulatory framework sufficiently addresses the risk of 'naked' short selling.
“In the event that the broker does not get a validation from the custodian before the execution of the sell order, the broker attracts a penalty,” the CMA said.
Naked short-selling can distort market prices by creating a false demand that could inflate stock prices. If a client sells shares they do not have, they may be forced to buy them at a premium or create false demand for a share, which can have negative consequences for the market.
The NSE has acknowledged the issue and is working to allow brokers to have visibility of shares through the Broker Back Office system for non-custodial trades.
