Market keeps close watch on Korea's short-selling ban decision

Korea’s six-month ban on short selling is set to expire on September 15, fueling market chatter whether or not the country’s financial watchdog will extend the ban or lift it for good.

In March, the Financial Services Commission (FSC) implemented a ban on short selling between March 16 to September 15 to prevent a crash in the domestic stock market following market volatility, including an overwhelming outflow of foreign capital, in the wake of the coronavirus outbreak.

This is the third time Korea has blocked short selling, following the global financial crisis in October 2008 and the European financial crisis in August 2011.

With just a month remaining to determine the future of short selling in Korea, the FSC has not made any official announcements, although comments from its Chairman Eun Sung-soo imply the ban may be extended.

“We banned short selling in response to the coronavirus, and we will keep in mind that the global pandemic has not ended,” said Eun at a National Policy Committee meeting July 29.

Eun's comments may quench concerns among retail investors, who have continually expressed negative sentiment towards short selling.

In Korea, short selling is almost exclusively the domain of institutional and foreign investors, much to the chagrin of retail investors who feel cut out by high trading fees and restricted trading periods, among other factors.

Meanwhile, Eun's comments may not sit well with stock market experts who argue that short selling will deflate the stock market bubble and attract overseas investors, both important to boost the market.

“Short selling is used as hedging as well as an investment strategy for overseas investors. If it is banned then overseas investors may be reluctant to enter the Korean market,” said Lee Kyung-min, an analyst at Daishin Securities.

Those who want to bring back short selling say that the market needs active investments from overseas investors, who account for a large portion of capital inflow, to beef up the market.

Ko Eun-ah, a director at Credit Suisse, expressed concerns that an extended ban on short selling may lead to capital outflow from the stock market and reduce Korea's presence in the MSCI Index. Ko was at a public hearing hosted by the Korea Exchange to discuss the impact of the ban on short selling.

Those who oppose short selling insist that the emphasis should be put on market stabilization. They argue that restoring short selling may spark speculative trading, hurting individual investors who have limited access.

Despite concerns that short selling will disrupt the market, those who advocate it insist it will not affect general market trends. Historically when short selling was restored, the KOSPI saw a brief one-month adjustment period before continuing its upward trend, according to Daishin Securities.

“The financial market is fluctuating in fear of the coronavirus and short selling may amplify doubt in the market. We need regulations to stabilize the market and it's worth considering a ban on short selling until the crisis alleviates,” said Hwang Seiwoon, a researcher at the Korea Capital Market Institute.

Hwang added that even if the ban is temporarily in place, short selling should not be abolished because it prevents a stock market bubble and expands liquidity in the market.

Hwang stressed that short selling should remain to maintain market efficiency, and instead the issue on retail investors' limited access to short-selling should be addressed.

On August 12, the Kospi index rallied for seven days and ended at the highest level in two years and two months, according to the Korea Exchange. It closed above the 2,400 mark, the first time since posting  2,404.04 on June 15, 2018.

"The extended rally can be credited to Korea's ban on short selling," said Kim Soo-yeon, an analyst at Hanwha Investment & Securities. According to Kim, other markets including Taiwan and some European countries, banned short selling in response to the global pandemic but eventually lifted the ban when the markets stabilized between May and June.

Kim added that if the ban is extended there is a greater chance of repercussions from panic buying.

"We can't deny how short selling helps stabilize excessively increased share prices," Kim said.

Between March and early August, individual investors bagged 31.25 trillion won whereas overseas investors and institutional investors offloaded 21.68 trillion won and 9.12 trillion won, respectively, taking a step back from the highly volatile market.

Individual investors are holding a firm lead in the stock market, but there were some noticeable changes in July when overseas investors went on a buying spree worth 895.5 billion won of shares from the domestic stock market.

According to the financial industry, the FSC is currently reviewing follow-up procedures regarding the short-selling ban. The financial watchdog is expected to decide close to the September deadline.

 

Write to Chang Jae Yoo at yoocool@hankyung.com