Short Selling Card Played... "Insufficient to Prevent Stock Market Shock"

Targeted Speculative Forces in Specific Stocks
Split Transactions Raise Doubts About Effectiveness
"Temporary Ban on Short Selling" Voices
Government to Expand Short Selling Measures in Phases

[Asia Economy Reporter Park Jihwan] The government has proposed expanding the designation criteria for 'short-selling overheated stocks' to ease stock market instability, but some market participants argue that this measure is insufficient to prevent a stock market shock.

According to the government on the 10th, financial authorities will relax the designation criteria for short-selling overheated stocks and extend the trading ban period for three months starting from the 11th as a market stabilization measure. This is part of activating a phased contingency plan in response to the global financial market shock caused by the COVID-19 pandemic and the continued downturn in the domestic stock market.

Currently, the short-selling overheated stock designation system for KOSPI applies when △short-selling ratio is 18% or higher, stock price decline is between 5-10%, and short-selling trading volume growth rate is 6 times or more △stock price decline is 10% or more and short-selling trading volume growth rate is 6 times or more. For KOSDAQ and KONEX markets, the criteria are △short-selling ratio 12% or higher, stock price decline 5-10%, and short-selling trading volume growth rate 5 times or more △stock price decline 10% or more and short-selling trading volume growth rate 5 times or more. In the KOSDAQ market, stocks can also be designated if the short-selling trading volume growth rate is 5 times or more and the short-selling ratio was 5% or higher over the previous 40 trading days.

Once designated as overheated stocks, short-selling is banned for one day. The Financial Services Commission decided to expand the designation criteria such as trading volume growth rate and stock price decline rate and to gradually extend the short-selling ban period from the current one day to two days or more.

However, the actual effectiveness remains uncertain. In particular, there are concerns about how effectively this measure can control speculative short-selling targeting specific stocks, given that short-selling transactions are usually planned and executed over several days rather than just one day. A financial investment industry official said, "Even if short-selling is restricted for one or two days or short-term periods, the effect of the restriction may not be significant."

Some voices argue that the expansion of the short-selling designation criteria is too weak a measure and call for a temporary ban on short-selling transactions. On the same day, Kim Byung-wook, a member of the Democratic Party of Korea, pointed out, "The relaxation of the designation criteria for short-selling stocks is a measure applied to stocks where short-selling has already surged and caused price fluctuations, aimed at addressing risks in specific stocks rather than the entire market." He emphasized, "Currently, the overall market is weighed down by anxiety due to COVID-19, including overall investment sentiment contraction and uncertainty in economic outlook. Therefore, a temporary ban on short-selling itself should be implemented." He argued that now is the time to impose a temporary short-selling ban.

It appears unlikely that a temporary ban on short-selling or the immediate introduction of a 'Hong Kong-style short-selling designation system,' which allows short-selling only for stocks with a certain market capitalization or higher, will be implemented this time. A financial authority official stated, "The options of a complete temporary ban on short-selling and the introduction of the Hong Kong-style short-selling system are likely to be excluded from this measure." This is interpreted as leaving the strongest card in reserve in case the announced measures fail to curb the overheated short-selling atmosphere.

The Financial Services Commission plans to strengthen response measures in the future based on the situation, as the prepared contingency plan includes temporary short-selling ban measures.

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