Calls grow for further or indefinite extension of short-selling ban

South Korean retail investors are speaking out against the lifting of a one-year ban on stock short selling ahead of its resumption scheduled for mid-March, warning that domestic stock markets may have to give up most of their gains made in the absence of the practice.

Ruling party members are joining forces to call for a further extension or even a complete abolishment of short selling, in contrast to other countries which lifted short selling bans last year.

South Korea has blocked short selling of stocks since March 16, 2020 when the global pandemic sent financial markets tumbling. The ban was extended last August for another six months until March 15 of this year.

Over the past 10 months, the country's benchmark stock index Kospi has more than doubled from its trough of 1,457.64 scraped on March 19, 2020.  It touched a historic high of 3,266.23 on Monday, after breaking through the 3,000 mark for the first time last week. 

As the day of lifting the ban draws near, a retail investor posted a request for an “indefinite ban on short selling” on the petition bulletin board of the presidential Blue House website. The petition has won support from over 60,000 people.

They argue that the short-selling market is an uneven playing field, heavily tilted toward both foreign and institutional investors. Retail investors, behind the Korean stock markets' bull run since last year, accounted for a meager 1.1% of short-selling trade in 2019.

Chung Ui-jung, an operator of Korea Stockholders Alliance, an online community for retail investors, echoed the request, saying: “Once short selling resumes, speculative investors may dump stocks, pushing the Kospi index to the low end of the 2,000-point range.” 

Park Yong-jin, a lawmaker of the ruling Democratic Party, cited illegal short selling conducted last year by some brokerage companies, designated as market makers, as the reason for keeping the short-selling ban in place. “If short selling resumes, illegal activities will prevail.”

POPULIST IDEA?

The financial industry and academia dismiss the growing call for a continued ban on short selling as a populist idea.

Regulators believe conditions are ripe to lift the ban after local stock markets have been on a record-breaking bull run. 

“The short-selling ban was implemented as a measure to support pandemic-hit financial markets. But now that the Kospi has topped 3,000 points, there is little justification for maintaining the ban,” a government source told The Korea Economic Daily. “If we extend the short-selling ban again, it may send a signal to global investors that the South Korean economy remains unstable.”

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. Short selling is used as a hedging and investment strategy, helping to deflate stock market bubbles and to maintain market efficiency by stabilizing excessively increased share prices and boosting liquidity.

Alongside the temporary ban on short selling, Korean regulators have unveiled a set of measures to tighten their grip on short selling, including harsh punishment on illegal short-selling activities, prohibiting short sellers from participating in rights offerings and facilitating retail investors’ access to short selling.

“Among developed countries, it is only South Korea that has banned short selling for almost one year,” said a brokerage company CEO. “As long as we comply with global standards, foreign investors will build confidence in our capital markets.”

Write to Hyeong-ju Oh at ohj@hankyung.com
Yeonhee Kim edited this article.