Reasons for Short-Selling Restrictions Tightening from Bio Sector Onward

First Day of Stricter Regulations, 11 Places Banned
7 Bio Stocks Including Pharmicell and Seegene
Recently Linked to COVID-19 Theme Stocks

Trading Focused on Expectations Over Performance
Short Sellers Fuel Stock Price Decline
Buyback Anticipated as Overheated Stocks Designated

[Asia Economy Reporter Ji-hwan Park] Eleven listed companies will be prohibited from engaging in short selling transactions for two weeks. Among them, seven stocks?Pharmicell, DNA Link, Macrogen, Seegene, Appclon, Access Bio, and Intron Bio?are notable for being bio companies.

This confirms that companies invested in for their growth potential, despite unclear corporate earnings, are more likely to become targets of short selling. With strengthened regulations on overheated short selling stocks, including bio companies, attention is focused on how these measures will affect the stock prices of these companies.

According to financial authorities and the Korea Exchange on the 11th, the exchange designated 11 companies?Pharmicell, DNA Link, Macrogen, Seegene, ITCEN, Appclon, Access Bio, Elcomtec, Osang Jaiel, Intron Bio, and JSTNA?as overheated short selling stocks after the stock market closed the previous day. These stocks were selected as the first targets under the Financial Services Commission’s newly announced strengthened short selling overheating system on the same day, resulting in a ban on short selling transactions for 10 trading days (two weeks) starting immediately. This measure will be implemented for three months until June 9.

The Financial Services Commission’s announcement includes expanding the criteria for designating overheated stocks by lowering the threshold for short selling transaction amounts. For KOSPI stocks that fall more than 5% in price on the day, if the short selling transaction amount increases by three times (currently six times) or more compared to usual, they will be designated as overheated stocks. For KOSDAQ, the threshold is lowered to twice (currently five times). If the stock price falls more than 20% on the day, short selling will be banned from the next day if the short selling transaction amount increases by twice for KOSPI and 1.5 times for KOSDAQ.

Looking at the newly designated overheated short selling stocks, 64% (7 out of 11) are bio-related stocks. Although the short selling transaction amounts for these stocks only increased by 2 to 4 times compared to usual, they were newly designated due to the relaxed criteria.

Recently, KOSDAQ bio stocks have been heavily short sold as so-called "COVID-19 theme stocks." Among the top short selling volume stocks on KOSDAQ between the 2nd and 9th, many bio-related stocks such as Seegene (1.73 million shares), AB Pro Bio (1.23 million shares), and Komipharm (1.16 million shares) were included.

It is not new that bio stocks frequently appear among overheated short selling stocks. Looking at the short selling overheating designation status from November last year, before the COVID-19 crisis fully erupted, the stocks included Macrogen (twice), Binex (twice), Mezzion (twice), CMG Pharma (twice), Medipron (twice), Telcon RF Pharma (twice), Seegene, Bio Leaders, IQure, Woojung Bio, ST Cube, JW Shinyak, Engchem Life Sciences, and Crystal. Out of a total of 73 cases, 20 (27.4%) were bio stocks.

The active short selling in bio stocks can largely be attributed to the characteristics of the industry. These companies invest heavily in research and development (R&D) over a long period. Earnings come afterward. Due to the nature of the industry, it takes a lot of time to achieve concrete results such as successful clinical trials or new drug development, and the structure does not allow for substantial fundamentals. In particular, the small number of shares and trading volume make them especially vulnerable to short selling.

A financial investment industry official pointed out, "The stock prices of bio stocks are mostly formed based on expectations rather than actual earnings, and short selling forces often exploit this characteristic to drive down stock prices."

Hwang Se-woon, a research fellow at the Capital Market Institute, explained, "The recent concentration of short selling in bio stocks indicates that institutional and foreign investors believe there is a significant bubble. The main reason is that earnings are not clearly established, but stock prices have soared."

The market expects that the financial authorities’ recent strengthening of short selling regulations will not have a significant impact on the overall stock market. During the stronger temporary short selling bans in 2008 and 2011, the KOSPI index actually fell slightly.

However, there are also forecasts that the measures will have a positive effect on bio stocks, which had been heavily concentrated in short selling. Kim Ye-eun, a researcher at IBK Investment & Securities, evaluated, "The bio sector, which has a high proportion of individual investors, may rise due to short covering triggered by the strengthened designation system for overheated short selling stocks. The recent upward trend in earnings per share (EPS) in the bio sector is also positive."

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