'Up to 6 Months' Short Selling Ban Extension Gains Momentum... Measures to Address Loopholes

Possibility of Announcement as Early as This Week
Need to Consider Positive Effects Such as Liquidity Supply

[Image source=Yonhap News]

[Asia Economy Reporter Park Jihwan] Financial authorities are reportedly set to effectively decide on an additional extension of the short-selling ban as a preemptive measure to stabilize the stock market amid the resurgence of the novel coronavirus infection (COVID-19). It is highly likely that the extension plan will be announced after the scheduled securities industry meeting on the 27th and the second short-selling public hearing on the 8th of next month. However, if the market situation becomes urgent, the extension could be implemented as early as this week.

According to financial authorities and the financial investment industry on the 24th, the Financial Services Commission has settled on extending the short-selling ban, which is set to be lifted on the 16th of next month. The extension period is expected to be at least three months and up to six months. A financial authority official stated, "Considering the current public opinion and stock market sentiment, the extension of the short-selling ban appears inevitable," adding, "As with the March short-selling ban, the process will likely involve the exchange requesting the ban under the Capital Markets Act, followed by approval from the Financial Services Commission."

The Financial Services Commission is expected to submit the agenda to extend the short-selling ban at the upcoming regular meeting held every other Wednesday and make a final decision. Various proposals discussed at the securities industry meeting and the second short-selling public hearing will be reviewed before reaching a final conclusion. Short selling is an investment method where stocks not currently owned are borrowed and sold at the current price, with the promise to buy back the stocks within a set period to return the borrowed shares. In March, when the stock market plummeted due to COVID-19, financial authorities announced a six-month short-selling ban from March 16 to September 15.

With the short-selling extension plan becoming a foregone conclusion, attention is turning to the direction of improvements in the short-selling system. Financial authorities plan to first consider measures to address institutional loopholes in the operation of the short-selling system. Discussions are expected to cover expanding short-selling participation among individual investors, currently around 1%, imposing short-selling restrictions on securities firms acting as market makers, establishing systems to eradicate illegal naked short selling, introducing punitive damages for illegal short selling, and regulating short-selling permissions on a per-stock basis. These measures aim to prevent stock price bubbles during overheated markets and consider the positive functions of short selling, such as supplying market liquidity, rather than outright abolition.

However, individual investors are voicing strong demands for the complete abolition of the short-selling system rather than improvements. They argue that even if short-selling participation is expanded to individuals or restrictions are placed on blue-chip stocks, the information asymmetry disadvantage compared to institutions and foreigners cannot be resolved. They claim that leaving short selling, which inherently favors institutions, unchanged will continue to cause the same damages as before.

Kim Deuk-ui, head of the Financial Justice Solidarity, stated, "Realistically, it is difficult to abolish the short-selling system immediately, but restrictions must be significantly strengthened," adding, "Urgent measures include limiting exceptions for market makers, establishing systems to prevent naked short selling in the trading system, and setting limits on securities lending transactions since short selling is conducted through securities lending."

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