Analytical view of short selling's impact on TASI

Tadawul trading screen

A debate is currently ongoing about the impact of short selling on the performance of the Saudi Exchange (Tadawul), with some citing it — alongside geopolotical tensions — as a reason for the decline in the benchmark Tadawul All Share Index (TASI).

However, actual data suggests that this mechanism does not constitute a significant factor in TASI movement, especially when compared to the market’s size, traded liquidity, and usage levels in global financial markets, led by the US market.

Short selling in Saudi Arabia is carried out through a securities borrowing and lending system in Tadawul, under the supervision of the Capital Market Authority (CMA). The regulations impose a maximum cap on net short positions of approximately 10% of the company's free-float shares. However, the actual utilization of that mechanism remains very low.

Additionally, short selling cannot be executed until the underlying securities are borrowed. Additionally, the uptick rule is in place as a price protection mechanism that limits the impact of short selling on the prices of listed securities.

Furthermore, non-qualified investors are allowed to enter into securities lending transactions, either as lenders or borrowers, as stipulated in the Securities Lending Regulations.

Market data also indicates that the actual short-selling ratios for most listed companies typically range between 0.01% and 1% of free-float shares, which is a very limited percentage compared with the total trading volume. In addition, the value of securities lending and borrowing transactions represents only a small fraction of the total daily market liquidity.

When examining the overall market size, the reason behind the limited impact on the benchmark TASI index becomes clear. The market capitalization of TASI-listed companies exceeds several trillion riyals, while the size of short positions represents only a handful of this value.

For comparison, the US market, represented by the S&P 500 Index, witnesses extensive use of short selling. In many US companies, the short interest ratio typically ranges between 5% and 20% of free-float shares, and can exceed 40% in specific cases.

Accordingly, it can be concluded that short selling in the Saudi market plays a complementary role in enhancing pricing efficiency and liquidity, but it does not constitute a primary influence on index movement. Current figures clearly indicate that its scale remains small relative to the overall market size, particularly when compared with developed markets such as the US.

*Represents short positions for each security, excluding short selling deals at the March 8 close