South Korea’s financial regulator uncovers first cases of naked short selling

Financial Supervisory Service in Seoul [Photo by Kim Ho-young]

South Korea’s financial authorities have for the first time uncovered illegal naked short sellers who sell shares they do not own without borrowing them first and agreeing to deliver them at a fixed time.

The country has seen cases of naked short selling caused by order mistakes or errors, but this is the first time the Financial Supervisory Service uncovered malicious cases of naked short selling, confirming suspicions about illegal naked short selling being rampant in the local market. Traders must borrow a stock or determine that it can be borrowed before they sell it short.

The FSS said on Monday that 52 cases of naked short selling were uncovered during its probe in the first four months of this year. This is up more than 50 percent from 34 cases tallied last year and far exceeds a total of 33 cases uncovered from 2018 to 2021.

“Our investigations focused on stocks with a higher possibility of irregular transactions by abusing short selling,” the financial regulator said. “We also found the first malicious cases of short selling.”

Mostly foreign investors were found to have maximized profits by lowering certain stock prices after deliberately placing sell orders for those stocks without borrowing them. The FSS plans to refer the suspects to the Securities and Futures Commission for swift sanctions.

The FSS said it had investigated 76 cases of naked short selling and imposed fines on 33 cases since it launched a team dedicated to investigating short selling in June last year. Fines of 2.15 billion won ($1.6 million) were imposed on 31 cases and fines of 6.05 billion won on two serious cases. The remaining 43 cases were subject to penalties, the FSS said.

Of the 86 cases of naked short selling detected between last year and this year, 72 were committed by foreigners, accounting for 83.7 percent of the total. This proves allegations that the local stock market is becoming a playground for short selling by foreigners to be true.

A total of 253 stocks were designated as overheated this year, an increase of more than three times over the same period last year.