Short selling ban sparks biggest South Korea stocks rally since 2020
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Retail investors have staged protests against the practice, which they say leads to unfair advantages for foreign and institutional investors.
PHOTO: EPA-EFE
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SEOUL – South Korean stocks jumped after regulators reimposed a full ban on short selling for about eight months, a controversial move that the authorities said was needed to stop illegal use of a trading tactic deployed regularly by hedge funds and other investors around the world.
The ban may help appease retail investors who have complained about the impact of shorting – the selling of borrowed shares by institutional investors – ahead of April’s general election, several market watchers said.
However, it could deter participation by foreign funds in the US$1.7 trillion (S$2.3 trillion) equity market and complicate South Korea’s bid to seek a developed-market status in MSCI’s indexes.
The Kospi ended Monday up 5.7 per cent to cap its biggest gain since March 2020 amid a surge in trading volumes.
Overseas investors were big buyers on a net basis, indicating that funds were covering short positions.
Stocks that had recently witnessed an increase in short selling – including LG Energy Solution and Posco Future M Co – were among the biggest contributors to the benchmark’s advance.
The small-cap Kosdaq Index jumped 7.3 per cent.
The nation’s Financial Services Commission said on Sunday that new short-selling positions will be prohibited for equities on the Kospi 200 Index and Kosdaq 150 Index from Monday through the end of June 2024.
Pandemic-era restrictions on the selling of borrowed shares had been lifted for those two gauges only in May 2021, while the ban has remained in place for some 2,000 stocks.
“This policy reversal with respect to short selling is unwarranted at the current time,” said Exome Asset Management analyst Kang Wongmo.
“Many people view it as a political move aimed at next year’s general election,” he said, adding that the South Korean market tends to be “heavily influenced by retail investors”.
South Korea is set to hold elections for the National Assembly in April, and public perception of short selling remains deeply negative in the nation.
Some ruling party lawmakers had urged the government to temporarily end stock short selling in response to demands by retail investors, who have staged protests against the tactic from time to time and also made sporadic coordinated attempts to drive gains in stocks targeted by short sellers.
Most short selling in South Korea is conducted by institutional investors. However, it accounts for a tiny portion of the market – about 0.6 per cent of the Kospi’s market value and 1.6 per cent of the Kosdaq’s, according to exchange data.
Financial Supervisory Service (FSS) governor Lee Bok-hyun refuted the view that the ban was politically motivated, saying the suspension was necessary to protect retail investors and improve the short-selling mechanism.
The ban was “inevitable to introduce an advanced short-selling system”, he was cited as saying by Yonhap Infomax.
Sunday’s announcement comes just days after the financial watchdog said it plans a comprehensive probe into short-selling trades by global investment banks, with a view to root out the practice of naked short selling, which is illegal in South Korea.
Earlier in October, the FSS proposed the imposition of record fines on two global banks for “routinely and intentionally” engaging in naked short selling.
The so-called naked variety of the trade involves shorting shares without borrowing them first.
The Kospi surged earlier in 2023 on frenzied buying of electric vehicle battery names and chip stocks related to the artificial intelligence theme.
Concerns over geopolitical tensions and high interest rates reversed the rally in recent months, driving the benchmark into a technical correction and nearly erasing its gain for the year.
The gauge is currently up about 10 per cent in 2023 versus a 2.5 per cent advance in the broader MSCI Asia Pacific Index.
The latest ban is “unusual” as the authorities are comprehensively prohibiting short selling at a time when there is no major external risk, said Eugene Investment & Securities analyst Huh Jae-Hwan.
South Korea had banned short selling during the global financial crisis in 2008, amid the euro zone debt crisis and the US sovereign downgrade in 2011, and then again during the start of the Covid-19 pandemic in 2020.
While regulators argue that naked short selling inhibits fair price formation and hurts confidence, some observers say broad outright bans make the market less transparent and therefore less attractive.
Some also say that the restrictions may keep the market from being upgraded in MSCI indexes. BLOOMBERG
