Once resistant, Korean retail investors lend more stocks for short selling

South Korean retail investors, who had largely opposed the regulator’s lifting of the short-selling ban on large-cap stocks from May, are now taking advantage of the post-ban system.

Due to the COVID-driven volatility of the global stock market, South Korea had placed a short-selling ban on all listed companies from mid-March of last year. The government’s decision this February to resume short selling from May received heavy criticism from retail investors who called for a complete ban in fear of a major market plunge.

But contrary to their worries, not only did Korea’s benchmark stock index Kospi hit an all-time high last week, but retail investors themselves have started lending more stocks to institutional investors for fee gains on stock loans.

According to the securities industry on June 20, the total value of the stocks lent by individual investors at the country’s five major securities firms -- Samsung Securities, NH Investment & Securities, Mirae Asset Securities, Korea Investment & Securities and KB Securities -- now amounts to more than 17 trillion won ($15 billion).

“Compared to 2019, before the short-selling ban, the number of customers who signed up for our share lending service this year has increased by around 70%,” said an official responsible for stock loans at a major securities firm.

Retail investors can gain earnings from lending stock, similar to interest gains from lending money. The rate of earnings from stock loans in Korea typically ranges between 0.1% and 4.0% per annum.

The earnings that the stock lenders can make are calculated by deducting the brokerage commission, taken by the securities firms in handling the transaction, from the loan fees paid by the short sellers borrowing the stocks.

For shares of firms like Samsung Electronics Co., which are traded in high volume and for which short-selling demand is low, the stock loan earnings rate is lower than 0.5%. In contrast, the rate becomes much higher if the short-selling demand is high but the volume of shares out for loans is low.

Doosan Heavy Industries Co. and HMM Co. are good examples of such high-demand, low-supply stocks in the short-sale market. These two stocks are considered to be South Korea’s representative meme stocks, just like Tesla, GameStop and AMC Entertainment in the US.

Meme stocks are those that see excessive trading volume and dramatic price increases, mostly fueled by buzz on social media.  

Doosan Heavy Industries saw a 130% spike in its stock price between May 24 and June 7, when it set a new price record at 32,000 won ($28.21) per share. The short-sale balance for the stock also went up rapidly to 550 billion won ($485 million) on that day.

The short-sale balance is the total value of stocks already short sold in the market but that has not yet been paid back to the lender. In other words, it is the value of stocks that the short sellers must buy back in order to repay their stock loans. Sometimes a short covering occurs if the short-sold stock’s price keeps rising.

Short covering refers to buying back the same amount of shares that were initially sold short, to close out an open short position. The practice of short covering typically boosts the stock price to rise further, as it creates a large demand for the stock over a short period of time.

Rank	Company	Short-sale Balance (billion won)	% of market cap
1	Celltrion	1,098	2.93%
2	HMM	403	2.59%
3	LG Display	365	4.49%
4	Doosan Heavy Industries	311	3.01%
5	Shinpoong Pharmaceutical	141	3.41%
6	Posco Chemical	130	1.16%
7	Samsung Heavy Industries	124	2.82%
8	Doosan Infracore	121	3.44%
9	Netmarble	111	0.98%
10	Lotte Tour Development	109	7.47%

(Source: Korea Exchange; as of June 16)

Following a series of short-covering rallies and rapid price hikes, demand for Doosan Heavy Industries stocks in the short-sale market skyrocketed compared to the available volume in supply. It is reported that the short sellers paid a loan fee rate of more than 10% to borrow the company’s stocks.

Like in the case of Doosan Heavy, HMM’s short-sale balance went up to 403.4 billion won ($355.9 million), about 30 times that prior to the resumption of the short-selling practice in May. Sources report that the short sellers for HMM also paid a loan fee rate of 5-10% to borrow the stocks.

As short sellers in the Korean stock market are targeting only a limited number of stocks such as Doosan Heavy and HMM, it has become increasingly difficult for the securities firms, the brokers of the transaction, to secure enough supply to meet the demand. In such an environment, borrowing more stocks from individual investors is becoming more important for securities firms.

The individual investors who have lent their stocks in the market can receive back their volume, if they want, only after two trading days.

“As the practice of stock lending is still unfamiliar to many retail investors, some have been asking whether they can get their shares back on the same day of lending, especially when the stock price went up that day,” said a representative at a major securities firm.

Write to Jae-yeon Ko at yeon@hankyung.com
Daniel Cho edited this article.