Margin Purchases and Short Sales in Emerging Markets: Their Rationales and Design Variables

Abstract

Emerging equity markets generally need an exogenous liquidity supply in order to accelerate their development. Margin trading (margin purchases and short sales) represents an important vehicle which promotes exogenous supply of market liquidity. Adequately regulated margin trading can induce relatively powerful and short liquidity recoveries after market corrections or crashes. Vital to margin trading is a stock borrowing and lending system. Margin purchase and short sale facilities require regulators, financial intermediaries, and investors to have heightened risk management skills in addition to robust market infrastructure. Despite their standardized features, the actual design and operation of the market infrastructure necessary for margin trading should be country or market specific. The characteristics and composition of factors affecting the design and operation are dynamic and the key components of this important market infrastructure must be flexible so that they can change over time.