High short selling amid low trade volume clouds Korean stock market outlook

[Photo by MK DB]

South Korea’s stock market has seen a surge in short selling this month, with turnover plunging 31 percent on month. This is likely because retail investors are cutting back on stock trading following suspected stock price manipulation through contract for difference (CFD) accounts late last month, while institutional investors are betting on a decline in secondary battery-related stocks, which have risen sharply in a short period of time.

According to the Korea Exchange on Tuesday, the average daily trading volume in the domestic stock market this month amounted to 18.19 trillion won ($13.58 billion), marking a 31.1 percent decrease from April’s 26.4 trillion won. The average daily trading volume in the KOSPI market reached 9.09 trillion won, down by 27.8 percent from April’s 12.59 trillion won. The KOSDAQ market also witnessed a 34 percent drop in average daily trading volume, receding to 9.10 trillion won from April’s 13.81 trillion won.

While the inflow of investors’ fresh funds into the stock market has declined, short selling transactions have been on the rise. The average daily short selling volume in the KOSPI and KOSDAQ markets this year already exceeded the figures for 2020 and 2022, when the stock market experienced significant shocks. Particularly, the average daily short selling volume in the KOSDAQ market reached 233 billion won, representing a 76 percent surge compared to last year’s 132.6 billion won.

The decrease in trading volume and the increase in short selling are viewed as negative signs for the stock market. Experts interpret this as a signal that the domestic stock market has become overheated in the short term, especially with the significant surge in the stock prices of EV battery-related companies driven by potential benefits from the U.S. Inflation Reduction Act (IRA). Companies like EcoPro Co. and EcoPro BM Co. have seen their stock prices skyrocket by 435 percent and 148 percent, respectively, this year.

Consequently, short sellers are focusing on major battery stocks. As of May 11, POSCO Future M Co. had the highest short selling balance in the KOSPI market, amounting to 476 billion won. It was followed by HMM Co. (411 billion won), Celltrion Inc. (361 billion won), Kakao Corp. (341 billion won), and Amorepacific Corp. (314 billion won). In the KOSDAQ market, EcoPro and EcoPro BM had the highest short selling balances, reaching 735 billion won and 720 won, respectively.

Meanwhile, the number of minority shareholders in EcoPro and EcoPro BM has increased by 40 percent in the past three months. The number of minority shareholders in EcoPro BM grew from 225,303 at the end of last year to 297,848 at the end of the first quarter of this year, a 32 percent rise. EcoPro saw a 56 percent increase in the number of minority shareholders, rising from 109,619 to 171,131 during the same period.