Stock Short Selling Surpasses 1 Trillion Won in a Day... Foreign Investors' Short Selling Transactions Surge Amid Market Crash

[Image source=Yonhap News]

[Asia Economy Reporter Eunmo Koo] Despite the government's announcement of measures against short selling, the volume of short selling transactions in stocks has surpassed the 1 trillion won mark, recording the highest level of the year. In particular, the scale expanded due to a sharp increase in short selling transactions by foreign investors.

According to the Korea Exchange's Short Selling Comprehensive Portal on the 13th, the short selling transaction amount in the domestic stock market reached a yearly high of 1.0854 trillion won the previous day. Of this, 872.2 billion won was in the KOSPI market and 213.2 billion won in the KOSDAQ market. This exceeds the previous yearly high of 1.0806 trillion won recorded on the 9th.

When the government announced on the 10th, as part of market stabilization measures, a plan to relax the criteria for designating overheated short selling stocks and extend the trading ban period from 1 trading day to 10 trading days (2 weeks), short selling transactions temporarily decreased but the effect did not last long. The short selling transaction amount dropped from 1.0806 trillion won on the 9th to 668.6 billion won on the 10th, then increased to 793.1 billion won on the 11th, and surged to 1.0854 trillion won the previous day, setting a new yearly record.

Despite the 'pandemic' fear of the novel coronavirus (COVID-19) causing continuous plunges in the stock market, the authorities' measures have not shown effectiveness. The KOSPI fell sharply by 3.87% the previous day, dropping to the 1830 level. In the KOSPI market, a 'sidecar'?a temporary suspension of program sell orders?was triggered for the first time in about 8 years and 5 months.

The sharp increase in short selling transaction volume is mainly due to the rise in foreign investors' trading volume. The previous day's short selling transaction amount by foreign investors was 753.1 billion won, a 78.6% (331.5 billion won) increase compared to 421.6 billion won on the 11th. This is also a 26.9% increase over the previous yearly high of 593.6 billion won on the 9th. The short selling transaction amount by institutional investors was 323.7 billion won, which decreased by 41.7 billion won compared to the 11th, and individual investors' amount was 8.6 billion won, increasing by about 2.5 billion won.

Short selling is an investment technique where stocks expected to decline in price are borrowed and sold, and if the price actually falls, the stocks are repurchased at a lower price to return the borrowed shares, thereby making a profit. In other words, the structure profits as the stock price falls. However, since foreign and institutional investors utilize it while individual investors are excluded, there is much criticism that it is a 'tilted playing field.'

Last year, out of the total short selling transaction amount of 103.5 trillion won in the stock market, individual investors accounted for only 1.1 trillion won, or 1.1%, while foreign investors accounted for about 65 trillion won, or 62.8%, and institutional investors 37.3 trillion won, or 36.1%.

Because of this, voices calling for the complete abolition of short selling continue. There is a surge in demands to temporarily ban short selling in response to the recent market plunge. In this atmosphere, expectations are growing that temporary short selling bans and stock market stabilization fund measures will eventually be implemented. This is because individual investors' dissatisfaction with short selling is exploding, and these measures could also reduce unnecessary stock market volatility.

In Korea, temporary short selling bans were implemented twice during the 2008 global financial crisis and the 2011 European debt crisis. In 2008, when the global financial crisis hit due to the bankruptcy of Lehman Brothers in the U.S., short selling was banned on all stocks for eight months from October 1 of that year to May 31 of the following year. On June 1, 2009, the ban was lifted first on non-financial stocks.

Also, as the global economy was shaken again by the European debt crisis, short selling was banned on all stocks for three months from August 10, 2011, to November 9, 2011. After that, on November 10, 2011, the ban on short selling of non-financial stocks was lifted again, and the ban on financial stocks was lifted about five years later on November 14, 2013.

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