The corporate regulator ASIC is looking to update its short selling rules, as legislative sunset clauses start to kick in from October this year.

Short selling is when an investor sells a stock they have borrowed — in the hope the price will fall and it can be bought back cheaper to make a profit. Naked short selling is when an investor shorts a stock without first borrowing it.

The practice is the bane of public company CEOs as Tesla boss Elon Musk recently demonstrated on Twitter.

ASIC Commissioner Cathie Armour said: “It is important that short selling continues to be regulated appropriately so that our market remains orderly and transparent.

“The proposals strike a balance between providing efficiency and certainty and reducing the burden of compliance for businesses, and managing the risks that short selling poses to market integrity.”

ASIC is asking for feedback on whether to continue allowing:

  • Market makers of some exchange-traded funds to naked short sell units. (A market maker is a securities dealer who undertakes to buy or sell at specified prices at all times).
  • Naked short selling of deferred settlement stocks — that is, when the buyer settles after the usual ‘T+3’ (transaction plus three days) period.
  • Naked short selling of shares during an IPO that existing shareholders are offloading.
  • Changing the time that short positions are calculated.

Blue Sky Alternative (ASX:BLA) was subject to a massive short after US short seller Glaucus Research took a big position, alleging Blue Sky had “wildly exaggerated” assets under management and that their share price was only worth $2.66, not $11-plus.

ASIC says all of the orders that allow these activities have a 10-year sunset clause when they’re automatically repealed, the first of which kicks in from October 1.

“This ensures that legislative instruments like class orders are kept up to date and only remain in force while they are fit for purpose and relevant,” the regulator said.

They’re proposing to extends naked short selling to the SPDR 200/ETF as well.

Short selling of over 5 per cent of a company’s total register is considered high.

As of May 1, according to ASIC’s short selling records, small and mid-caps that fell into that category were:

  • Australian Agricultural Company (ASX:AAC) with 10.97 per cent being shorted
  • BWX (ASX:BWX) with 10.38 per cent
  • IMF Bentham (ASX:IMF) with 5.41 per cent
  • Metals X (ASX:MLX) with 7.98 per cent
  • NextDC (ASX:NXT) with 5.62 per cent
  • Quintis (ASX:QIN) with 8.39 per cent

Submissions to ASIC close on June 20.