Korean retailers campaign for short selling ban as stock market slump persists

[Photo by Yonhap]

South Korean retail investors heavily burned by institutional selling by domestic and foreign capital that has made Korean markets one of the worst performers this year are campaigning for a complete ban on short selling, putting authorities in a dilemma as the move cannot aid Seoul’s hops to upgrade the Korean market’s international status to developed category.

Retail investors accuse short selling as the main culprit behind the Korean stock markets’ latest routs. Among the major stock exchange in the world, the Kosdaq was the biggest loser and the Kospi the second, said Jung Eui-jung, chief of Korean stock investors’ alliance at Citizens’ Coalition for Economic Justice.

“Korean markets are at the bottom because they are vulnerable to short selling, and sharp falls are transferred on to retail investors in colossal losses,” claimed Jung.

Short selling is a legitimate trading strategy that bets on a decline in stock price. Short sellers profit by borrowing shares and then returning them with shares purchased at a lower price. The practice, primarily led by foreign investors in Korea, has been blamed for massive selloffs and high volatility in the Korean market.

Korean Financial Services Commission temporarily suspended short selling in the country from March 16, 2020 to May 2, 2021 after the country’s benchmark Kospi index plunged to the 1,700 level and the Kosdaq to around 520 in March 2020 when the global financial market was rattled by the onset of Covid-19, which was officially declared as a pandemic then.

The ban was lifted partially, for Kospi 200 and Kosdaq 150 stocks from May last year.

The Korean financial authorities are seeking to fully allow short selling in hopes to attract more foreign investors. The restriction has been an obstacle for its move in MSCI category to developed markets index from current emerging markets category.

Financial authorities have promised to take necessary steps to stabilize the stock market based on contingency plans when the market turns more volatile, but won’t likely return to short-selling ban.

They will likely toughen rules on naked shorting to better protect retail investors. It is proposing a ban on shorting for a specified period when a stock undergoes excessive fall.

[ⓒ Maeil Business Newspaper & mk.co.kr, All rights reserved]