Short selling has been practiced from the beginning of financial markets. In the latter half of 1980s and early 90s, trading was done in our stock market on what is called the ‘open outcry’ system and settlement was through transfer of share certificates. The selling broker settled trade through handing over signed share transfers with certificates. Settlement was on a fixed date- every Friday.
There were trades that failed when the selling broker could not hand over valid documents of transfer on settlement date. The Stock Exchange then bought against the selling broker who failed and the latter recovered the cost from the client who failed to deliver. The number of such failures increased and brokers were forced by their clients to sell without producing documents. The system could not cope and electronic trading was introduced
The writer is an economist and is the General Manager of a stock brokering firm.
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