[Short Selling at a Crossroads] 'Cold Water on the Stock Market vs. Foreign Investor Exodus'... Heated Debate

[Asia Economy Reporters Koh Hyung-kwang and Koo Eun-mo] As the temporary ban on short selling is less than a month away from being lifted, the debate over short selling is heating up even more. Negative public opinion, mainly among individual investors, that "if short selling resumes, stock prices will plummet again" is growing, deepening the financial authorities' dilemma over whether to extend the short selling ban. Experts argue that it is desirable to create conditions that allow individual investors to participate in the market on equal footing with foreign and institutional investors.

Short Selling Opposition vs Support in a Stalemate

At the discussion on "The Market Impact of Short Selling and Desirable Regulatory Directions" held on the 13th at the Bankers Hall in Myeong-dong, Seoul, Professor Kim Sang-bong of Hansung University stated, "Individuals are buying domestic companies' stocks with liquidity, but if short selling resumes, money will either flow overseas or real estate will become volatile again," adding, "The short selling ban should be extended until next year, and the system should also be reviewed."

Professor Kim advocates extending the short selling ban because short selling is blamed as the main cause of stock price declines and is perceived as the exclusive domain of foreign and institutional investors, who are the 'big players' in the stock market. In the domestic stock market, it is virtually impossible for individual investors, who have relatively low credit, to participate in short selling. For individuals to short sell, they must engage in 'securities lending transactions' through securities firms, but the lending stocks and periods are limited, and transaction costs are high, so trading is not active.

On the other hand, there is also a strong argument that the short selling ban should be lifted immediately. Short selling has positive functions such as preventing excessive price surges and bubbles during overheated markets and supplying liquidity during downturns. Moreover, continuing the ban raises concerns about the outflow of foreign capital. At the discussion, Ko Eun-ah, Executive Director at Credit Suisse Securities, said, "Foreign investment firms are avoiding the Korean market, which lacks hedging strategies since the short selling ban," and expressed concern that "some funds are moving to other markets with fewer investment restrictions, and if the short selling ban is prolonged, this trend will intensify."

The 'Tilted Playing Field' Needs Improvement

Since the core of the short selling debate is focused on fairness among investors, the emphasis should be on resolving this issue. Choi Yoo-jun, a researcher at Shinhan Financial Investment, said, "Even if individuals want to short sell, since short selling is a type of credit transaction, there is a difference in creditworthiness compared to institutions, limiting the stocks and quantities they can borrow," and argued, "It is necessary to approach the solution by improving the relatively low accessibility of individuals to short selling."

An industry insider said, "Considering the positive functions of short selling, such as price discovery, maintaining short selling is the desirable direction for the overall market," adding, "Rather than banning all short selling due to fairness issues, the number of stocks and quantities that individuals can short sell should be increased so that individuals can have at least minimal tools to prepare for downturns."

Yeom Dong-chan, a researcher at eBest Investment & Securities, also said, "Ways to improve individual access to short selling could include allowing naked short selling as in the U.S. or creating a system where the government provides securities lending services as in Japan." The Hong Kong-style short selling, which allows short selling only for large-cap stocks, is also mentioned as an alternative. Hong Kong permits short selling only for stocks with a market capitalization of 3 billion Hong Kong dollars (about 460 billion KRW) or more, aiming to protect small and mid-cap companies that are more vulnerable to sharp price drops due to short selling.

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