Relaxation of Market Making Obligations to Minimize Short Selling

[Asia Economy Reporter Ko Hyung-kwang] To minimize short selling by market makers who are exempt from the short selling ban, the market making obligations such as quote submission have been significantly relaxed. Only the market making function will be allowed within the scope that does not undermine market stability.

The Financial Services Commission (FSC) announced on the 18th, "To minimize short selling related to market making obligations, the Korea Exchange implemented additional measures yesterday, including changes to market making obligations," adding, "Some aspects of the market maker system were changed as part of the additional short selling measures."

The FSC imposed a short selling ban starting from the 16th, but short selling transactions have not completely disappeared since then. This is because some institutional investors still engage in short selling under the market maker exemption rule to enhance liquidity in stocks with sluggish trading despite the short selling ban.

The Korea Exchange decided to relax the market makers' market making obligation hours, mandatory quantities, and quote spreads to about half of the previous levels during the short selling ban period (6 months). Additionally, even if market makers do not properly fulfill their market making obligations to reduce short selling, they will not face penalties.

Market makers play the role of borrowing stocks and presenting bid and ask quotes to ensure smooth trading of stocks that require liquidity. They enter into market making contracts with the exchange and must continuously submit quotes for certain stocks during specified times. Therefore, market makers engage in short selling for hedging (risk avoidance) purposes during market making, and financial authorities do not consider this speculative, thus allowing short selling as an exception.

Previously, the FSC temporarily banned short selling for six months, but market makers were excluded from the regulation. However, individual investors and some civic groups have expressed concerns that market makers might exploit short selling to profit from sharp stock price declines.

An FSC official explained, "This measure restricts actions such as short selling specific stocks using the market maker system," adding, "The market maker system is intended to help stabilize the market, and even when short selling is banned abroad, the market maker system is maintained."

The FSC plans to analyze daily trading performance to identify factors increasing short selling, minimize the scale of short selling, and strengthen investigations and prosecutions of unfair trading such as market manipulation exploiting the short selling ban.

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