Complete ban on stock short-selling “to serve a political purpose, not to stabilize the market”

Kim Joo-hyun (right), chairman of the Financial Services Commission and Lee Bok-hyun, governor of the Financial Supervisory Service announce a complete ban on short-selling shares through June 2024, after a special meeting of the financial commission at the government complex in Seoul on November 5. Han Su-bin

Financial authorities have come under fire for succumbing to pressure with the parliamentary elections approaching and, on November 5, overturning their original position to ban short-selling shares through June 2024. In the past, they had insisted that the short-selling system had improved considerably after numerous upgrades. The authorities had been concentrating on getting the South Korean stock market into the Morgan Stanley Capital International (MSCI) developed markets index and had been reluctant to enforce a complete ban on short-selling shares.

Financial investment experts criticized the government’s temporary ban on short-selling as “a populist policy intended for the parliamentary elections.” Some individual investors had asked politicians and the government to ban short-selling, claiming it contributed to the drop in share prices. Their voices grew after the recent drop in secondary battery share prices and HSBC and BNP Paribas were caught engaging in naked short-selling.

After word spread about a complete ban on short-selling among politicians, particularly from the People Power Party (PPP), financial authorities distributed a press release stating, “Nothing has been determined about a complete ban on short-selling” on November 3. They had maintained the position until Sunday morning, then at 5:30 p.m. announced the ban. The financial authorities announcing a major policy on Sunday evening was unprecedented, except during a financial crisis. This triggered suspicions of political pressure, making it difficult for the state to avoid attacks that they approached a financial policy not from an economic perspective but a political one.

One financial investment insider who asked to remain anonymous said, “Authorities sometimes ban short-selling to stabilize the market when the market temporarily faces a major shock, such as the covid pandemic, but now is not that kind of situation,” adding, “Short-selling is already being consumed as a political issue.”

He said he could not agree with the government’s explanation that the temporary ban was to secure time to improve the system and argued, “If naked short-selling is the problem, then they should punish it more severely. But they haven’t said anything about how they would punish them (the two investment banks caught engaging in naked short-selling).”

The market also voiced concerns that the domestic stock market could end up as the “playground for stock manipulators” due to the ban. Short-selling profits from betting on falling stock prices, so stocks with surging prices are the target. It can keep stocks from being overvalued. But if short-selling is banned completely, it will be hard for anyone other than the financial authorities to keep such abnormal surges in stock prices in check. Prosecutors are currently investigating Youngpoong Paper for market manipulation. Short-selling of their shares was not possible.

“Some individual investors tend to think that short-selling is the main cause of stock prices falling, but short-selling has the function of discovering the adequate price and of lowering market volatility,” another financial investment insider said, adding, “If short-selling of Youngpoong Paper shares was possible, people would have engaged in short-selling when they thought the shares were overvalued, lowering the value of shares.”

The temporary ban on short-selling has led to higher uncertainty in the nation’s policy, weakening the credibility of the South Korean stock market and possibly hindering the government’s plans to have the market included in the MSCI developed markets index. “Uncertainty is what foreign investors hate the most,” the industry insider said, adding, “Now, I guess we can say that the MSCI developed markets index is out of the question.”