Effectiveness of Government's Short Selling Measures 'Questionable'... Kim Byung-wook Calls for Temporary Ban

[Asia Economy Reporter Park Ji-hwan] As the stock market has been plummeting daily due to the novel coronavirus infection (COVID-19) crisis, the government has decided to introduce measures related to short selling to prepare for further stock market declines. The focus is on effectively imposing a temporary ban on short selling by expanding the 'criteria for designating short selling overheated stocks,' which prohibits short selling on stocks with a rapid increase in short selling transactions, and extending the ban period from the existing one day to two days or more.

Deputy Prime Minister and Minister of Strategy and Finance Hong Nam-ki held a meeting of related ministers (Green Room Meeting) at the Government Seoul Office on the 10th and announced this policy. The main points of this measure are to ease the designation criteria for short selling overheated stocks for three months as a market stabilization measure and to extend the trading ban period. The trading restrictions will be applied from the 11th according to the revised criteria. This measure is essentially the activation of an initial contingency plan in response to the recent stock price plunge caused by the spread of COVID-19.

Short selling is an investment technique where investors borrow stocks expected to decline in price, sell them, and then repurchase them at a lower price to return the borrowed stocks and earn a profit.

The current short selling overheated stock designation system designates stocks as overheated if the short selling transaction amount increases more than six times (five times for KOSDAQ) and the stock price falls by 10% or more. Once designated as an overheated stock, short selling is prohibited for one trading day on the following day.

According to this decision, the Financial Services Commission is expected to expand the application of the criteria for designating short selling overheated stocks, such as transaction amount increase rate and stock price decline rate. It is also reported that the plan includes gradually extending the short selling ban period from the existing one day to two days or more.

There are voices questioning how effective the designation criteria for short selling overheated stocks will be.

On the same day, Kim Byung-wook, a member of the Democratic Party of Korea, explained, "The easing of the criteria for designating short selling stocks is a measure applied to stocks where short selling has already surged and caused price fluctuations, aimed at addressing risks of specific stocks rather than the entire market."

Kim said, "Currently, the overall investment sentiment contraction and economic outlook uncertainty due to COVID-19 are pressing down on the market with anxiety about the entire market," urging for a temporary ban on short selling.

He emphasized, "Instead of easing the criteria for designating short selling stocks, a temporary ban on short selling itself should be implemented," adding, "Policy is about timing."

This content was produced with the assistance of AI translation services.