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Short selling ban

Korean govt extends ban on short selling to appease retail investors

Aug 27, 2020 (Gmt+09:00)

The South Korean government has decided to extend the ban on short selling for another six months -- from September 16 to March 15, 2021 -- prompted by fears of volatility in the stock market on a resurgence in coronavirus cases, according to the Financial Services Commission (FSC) on August 27.

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. The new extension makes it the longest ban on short selling in Korea. Originally the ban was set to expire on September 15.

FSC Chairman Eun Sung-soo speaks at a national policy meeting 

"We will draft reform measures to provide fair opportunity and access for individual investors in the short-selling market," said FSC chairman Eun Sung-soo during a roundtable earlier today (August 27).

Potential improvements may include expanding the securities lending market to facilitate individual investors' access to short selling, currently 99% dominated by institutional investors and foreign investors.

Other measures may include polishing the uptick rule and adopting Hong Kong's short-selling system, wherein the practice is restricted to shares of companies with a market capitalization exceeding HK$3 billion and daily turnovers more than 60% of their market cap.

In addition to boosting retail investors' place in the short-selling market when the ban is lifted, Chairman Eun said that the regulator will examine the needs and side effects of market makers' roles and functions. Further, an amendment to the Financial Investment Services and Capital Markets Act has been put forward to the National Assembly, which aims to strengthen sanctions on illegal short-selling practices.

The extended ban may come as good news for some, in particular the investment banking industry, which had earlier raised concerns that lifting the ban may impede planned rights offerings and initial public offerings, as previously reported by the Korean Investor.

The ban blocked investors from short selling to cut prices of newly offered shares, which made it easier for Korean companies to raise capital via rights offerings. There were concerns that some companies could become targets once the ban is lifted. For example, pharmaceuticals and bio companies, often victim to speculators in the past, would be particularly vulnerable to short selling.

On the other hand, the extended ban is likely unwelcomed by those concerned about its long-term market consequences.

Industry experts stress that short selling helps to deflate the stock market bubble and attracts overseas investors, both important to solidify the market.

The prolonged ban may deter foreign investors from the Korean market as short selling is used as a hedging, as well as an investment strategy, for them. This does not bode well for the long term since the market needs active investment from overseas investors, who account for a large portion of capital inflow.

At a public hearing earlier in this month, 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 on the MSCI World Index.

Meanwhile, a complete overhaul of the short-selling system is unlikely to occur given consensus that short selling helps maintain market efficiency by stabilizing excessively increased shares prices and boosting liquidity.

The short-selling ban was implemented in March 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.

Short sellers borrow shares and immediately sell them, betting that the price will fall before they buy back the shares and return them to the lender, taking the price difference, or margin, as profit. It is considered to be a risky, but lucrative, trading strategy, mostly applied by hedge funds.

Last year, short-selling trade reached a combined 103.5 trillion won ($87 billion) on both the KOSPI and KOSDAQ stock markets, of which retail investors accounted for a meager 1.1%.

By Hyeong-ju Oh


Danbee Lee edited this article

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