The Jamaica Stock Exchange (JSE) has firmly established itself as a mature and successful institution, rightly celebrated as a leading regional exchange. For any market that reaches this level of sophistication, the journey doesn't end, it evolves. The development of a robust derivatives ecosystem is not a radical or risky venture, but rather the next logical chapter in our market's growth story. It represents the natural progression from a simple cash equities market to a dynamic, multi-faceted capital market capable of attracting more sophisticated capital and providing powerful new tools. The introduction of equity index futures and options is an inevitable and necessary step, one that will unlock new efficiencies, provide critical risk management capabilities, and deepen overall market liquidity for the benefit of all participants.
The Critical Role of Dealer Short Selling
A vibrant derivatives market cannot be willed into existence, it must be built upon the proper foundation. The single most important piece of that foundation is the ability for authorized participants to short sell the underlying assets. This mechanism is essential for the dealers and market makers to provide liquidity. When a dealer sells an index future or writes a call option to an investor, they take on a "short" exposure to the market. To manage the risk of that position, they must be able to create an offsetting one by buying a basket of the underlying stocks that replicate the index, which is fairly straightforward. However, when a dealer is providing liquidity in the opposite direction by buying a call option or an index future from a client, they hedge by shorting a basket of the underlying components. Without this shorting capability, the risk to market makers would be unmanageable, essentially forcing the trading desk to take a view in the direction of the security, which is not the primary business of a market maker. The foundational work is already underway, as the Jamaica Stock Exchange has announced it is working to implement a framework for short selling, with a target of late 2025. This crucial development is the catalyst that moves the conversation about derivatives from the theoretical to the practical.
The Risks of No Short Selling
Consider the following sequence; a client goes short an index future with Dealer A, leaving Dealer A long. Unable to short the underlying basket, Dealer A flattens by selling an offsetting future to Dealer B. Dealer B is now long and, facing the same constraint, passes that long on by selling a future to Dealer C, and so on. The chain only terminates when a participant is willing to hold the residual long-futures exposure unhedged or can hedge it with something other than short stock. In other words, without shorting, the interdealer loop does not naturally filter into the cash market. There are two practical “stoppers” to this loop, neither of which delivers balanced two-way cash hedging. First, if the market has natural longs, asset allocators who actually want futures exposure, they can absorb the residual long without hedging. This keeps the risk inside the derivatives market rather than transmitting it into spot. Second, if futures become rich versus fair value, dealers can execute a cash-and-carry (buy the basket, short the future). That trade does transmit buy-side flow into the underlying securities, but only in one direction and only when pricing is rich; the reverse cash-and-carry that would require shorting the basket and buying the futures contract (to correct underpriced futures) is impossible. The result is asymmetric basis correction: overpriced futures can be arbitraged toward fair value via spot buying, but underpriced futures can persist because the mechanism that would sell the basket is blocked.
This asymmetry has clear market-quality consequences. Net client demand for short futures will push prices cheap relative to fair value and keep them there, since no one can short the constituents to close the gap. Dealers will compensate by widening spreads, charging higher carry, or reducing sizes, and risk will warehouse in fewer hands, increasing concentration. Price discovery will migrate toward expiry, where cash settlement forces convergence mechanically, but day-to-day basis may be volatile and biased. Options inherit the same constraint: writers hedging long calls or short puts can offset with futures, but the loop still ends with someone warehousing delta because the spot short leg is missing.
The Foundational Prerequisite
In short, a no-shorting regime does not make index futures and options impossible, but it makes them one-sided. Hedging flows only add buy-side depth to the underlying via cash-and-carry when futures are rich; there’s no symmetric pathway to transmit sell-side pressure into spot when futures are cheap. That reality limits liquidity, distorts the basis, concentrates risk, and ultimately reinforces why short selling (and a securities-lending framework) is not just helpful, it’s foundational for a healthy two-way equity derivatives market, a dynamic that participants can master using Celeraq’s trading simulator. Currently only simulated futures on our concentratrated market cap weighted index, the Celeraq Jamaica 30 Index is available on the trading simulator.
