[At a Crossroads: Short Selling] Trauma, Dilemma, and Short Selling

Investment Strategy Profiting When Stock Prices Fall
Retail Investors Say "It Encourages Market Decline"
Calls for 'Abolition' Even in National Petitions

Has Positive Effects Like Removing Stock Bubbles
Institutional Investors Left 'Silent and Frustrated'
Decision on Next Month's Ban Extension Draws Attention

[Asia Economy Reporter Park Ji-hwan] Office worker Lee Chang-jun (40, pseudonym) still feels the pain when he thinks back to four years ago. On September 29, 2016, Hanmi Pharmaceutical announced after the market closed that it had signed a technology export contract worth 1 trillion won, a positive disclosure, followed by a negative disclosure the next morning that another technology export contract had been canceled. Institutional investors quickly short-sold stocks at 20 times the usual volume before the negative disclosure, making huge profits. However, Lee’s situation was the exact opposite. He lamented, "Because of the institutions’ short selling, the stock price plummeted from the 600,000 won range to the 400,000 won range in two days," adding, "I cut my losses, accepting a loss of tens of millions of won, thinking I should not lose the seed money I had worked hard to save."

Short selling is a trauma for individual investors. It is not uncommon for them to suffer losses helplessly due to short selling by foreigners and institutional investors. Short selling is an investment technique where stocks that are not actually owned are borrowed and sold at the current price, and then repurchased within an agreed time to return the borrowed stocks. Since profits are made only when the stock price falls, stocks with heavy short selling are likely to decline in price.

As stock prices plunged due to the spread of the novel coronavirus infection (COVID-19), the government temporarily banned short selling last March. The ban is set to last until the 15th of next month. Individuals are demanding not only an extension of the short selling ban period but also a complete abolition, citing reasons such as "short selling encourages stock price declines" and "short selling, which is difficult for individuals to access, is a tilted playing field." Last year, individual investors accounted for only 1.1% of the 103.4936 trillion won in short selling transactions in the stock market. Foreigners (62.8%) and institutions (36.1%) accounted for a total of 98.9%.

According to a public opinion poll conducted by Realmeter, a professional polling agency, on 1,000 adults earlier this month, more than six out of ten citizens responded that short selling should be abolished or the ban period extended. The highest proportion, 38%, advocated for the abolition of short selling, while 25.6% said the ban period should be extended. Especially among respondents with high interest in the stock market (49.1%) and those with investment experience (45.9%), nearly half demanded a complete ban on short selling.

There are about 3,200 public petitions related to short selling on the Blue House website. Most call for the complete abolition of short selling. One petitioner lamented, "It’s a league of their own with no laws, or laws that are not followed," adding, "I have no power or backing, so I am only afraid of short selling."

Institutional investors such as securities firms are like "mutes with a cold heart." This is because short selling is an investment technique adopted by most major countries and has many positive functions.

When stock prices are overvalued, short selling helps remove the bubble from overheated prices. In a bear market, it also supplies liquidity to the stock market. For this reason, in May, six European countries?France, Italy, Spain, Belgium, Austria, and Greece?lifted their short selling bans. The United States, the United Kingdom, and Japan did not implement short selling bans at all. However, in South Korea, it is hard to hear voices calling for a quick resumption of short selling. This is because the voices of individuals have grown louder through the "Donghak Ant Movement," and even the political sphere views short selling negatively. President Moon Jae-in’s statement at the end of June regarding tax reform, saying "It should not be a way to shrink the stock market or dampen the enthusiasm of individual investors," also had an impact. A securities industry official said, "It is difficult even to say that 'short selling is not all bad' in the current atmosphere."

The government will decide whether to extend the short selling ban early next month. Since there are many opinions in the political sphere to "revise the short selling system to fit reality this time," it is widely expected that a full resumption of short selling will not be easy until improvement measures are prepared. However, it is likely that short selling will be resumed in a limited way, focusing on large-cap stocks, to expand foreign investment.

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