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Olam's naked short - some issues to consider

Readers of Saturday's and today's BT would know that there was a naked short sale of 13.2m Olam shares that was undertaken last Tuesday, the eve of the day when Olam was dropped from the SiMSCI Index and replaced by Suntec Reit. The short sale was most probably done at $2.15 and on Friday only 4.1m was bought-in, at an average price of around $2.35 (the high was $2.43). This means that the party or parties who shorted Olam on Tuesday are down about 20 cents per share or  $800,000 so far. The remaining 9.1m will have to be covered today, starting around 2pm.

Quite correctly, dealers are asking - who shorted? Logically, it has to be parties who are able to bear that kind of risk, so it would have to be an institution. If so, does the fund's sponsors know of such a trade? If the final  loss runs into the millions - which it is likely to - what might the penalties be?

Second, note that if there was a cash market in operation, there would not be a need for buying-in, which it has to be said is an archaic way of ensuring settlement. A cash market used to exist but for reasons unknown, it was taken away many years ago; for those who remember, it was a segment where stock could be bought for upfront cash payment with immediate delivery. So if someone was short at 5pm, they would simply buy in the cash market the next day for delivery on the due date. 

Even better would be a system which does not allow short selling if there are insufficient shares in the seller's CDP account. This is the system in other countries like Hong Kong, where it is also illegal to undertake a naked short. 

Still, for better or worse, our system is that if you are caught short, you face buying-in 3 days later, with the risk that the position will be filled at much higher prices that the original short sale. The Olam short seller is now sweating to see what prices the remaning 9.1m will be bought in this afternoon. 

PS The investing public cannot see the buying-in segment. Even mobile brokers don't have access; it is only visible and accessible to dealers with SGX's SESOPS terminals.