Short-sales conundrum

Anup Menon

THE availability of single-stock futures may help prevent short sales in the underlying/spot market.

At present, the regulations do not permit mutual funds to short-sell stocks which are over-valued. This essentially means that funds cannot use short-term aberrations in the market effectively. However, if they enter the stock futures market, they could use an organised exchange-traded product to maximise returns.

An argument against this could be that funds are allowed to use the index futures market. However, by using the index futures market, one gives the impression that the entire index or most of the stocks constituting the index are overpriced. This may not be the case and, hence, the returns may not be in tune with expectations. Apart from this, lower short-sales in the spot market mean the volatility of the spot market will also decrease. This will help protect the interests of the long-term investor.