Short Selling Privileges?...Financial Authorities to Conduct Inspection of the 'Market Maker System'

[Image source=Yonhap News]

[Asia Economy Reporter Koh Hyung-kwang] Financial authorities are considering inspecting the 'market maker system,' which was introduced to provide liquidity to the market. This comes amid concerns that large securities firms acting as market makers are abusing short selling.

On the 30th, according to financial authorities, the Financial Services Commission and the Financial Supervisory Service are discussing plans to conduct an inspection of the Korea Exchange, which operates the market maker system, within this year. If confirmed, this will be the first inspection since the market maker system was introduced in 2016.

The market maker system is a mechanism where securities firms contracted with the Korea Exchange continuously provide two-way quotes, such as buying and selling, for stocks requiring liquidity, helping investors trade smoothly. It functions to mitigate sudden price fluctuations. A total of 12 firms, including nine domestic securities companies and three global investment banks, are engaged in market making.

Market makers argue that hedge trading through short selling is necessary to supply liquidity. Although a temporary ban on short selling was imposed for six months from March 16 to September 15, market makers were exempted from this ban. Under normal circumstances, they can conduct short selling on stocks designated as overheated or banned for short selling and are also exempt from the 'Up-tick rule' (a price movement restriction regulation).

However, when financial authorities excluded market makers from the short selling ban, individual investors' dissatisfaction grew. They claim that market makers use short selling for arbitrage between stocks and futures under the pretext of risk hedging, and that giving them special privileges during periods of high market volatility is unfair.

In response, financial authorities extended the short selling ban for another six months until March next year and introduced a review of the market maker system. On the 27th, Financial Services Commission Chairman Eun Sung-soo stated at a meeting with securities firm representatives, "We plan to reassess both the necessity and side effects of the functions and roles of market makers."

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