'Stepwise Individual Short Selling Permission Plan' Tilted Playing Field Remains... Angry Retail Investors

Eun Sung-soo "Allowed for Professional Investors"
Introducing Qualification Criteria Like Private Equity Funds

Financial Services Commission to Establish Lending Stock System
Increasing from Current 20x to 1.4 Trillion Won

No-Loan Short Selling Prevention System Fails
Retail Investors Demand "Abolish Short Selling"

[Asia Economy Reporter Park Jihwan] Financial authorities are pushing forward with a 'short-selling system improvement plan' focused on the gradual expansion of individual investors' participation. Many individual investors who have demanded the complete abolition of the short-selling system immediately opposed this. Attention is focused on whether the specific improvement measures to be announced in the future can resolve the dissatisfaction of individual investors.

On the 14th, Eun Sung-soo, Chairman of the Financial Services Commission, said at an online (non-face-to-face) year-end meeting with the press corps, "Allowing short-selling initially to asset holders or professional investors who can bear responsibility and then expanding it could be a compromise." Considering that the current short-selling system is criticized as a 'tilted playing field' favoring foreigners and institutional investors, he proposed a compromise between opinions that individual participation opportunities should be increased and concerns that expanding the target would only increase individual investors' losses. As of last year, the proportion of domestic stock trading volume by investor type was 19.8% for foreigners, 14.8% for institutions, and 65.4% for individuals, whereas the short-selling trading volume proportion was 62.8% for foreigners, 36.1% for institutions, and only 1.1% for individuals, showing a significant gap.

Chairman Eun explained, "We will open short-selling opportunities to individuals, but not just anyone can short-sell through securities lending." He added, "Just as qualified investors exist in private equity funds, we will define professional investor qualifications and initially allow those investors who can bear responsibility, then review whether to expand this or maintain the status quo." This means introducing similar standards for short-selling as the qualified investor requirement of at least 300 million KRW for professional private equity fund investments.

Currently, the Financial Services Commission plans to build the 'K Lending System' by March next year, assuming the resumption of short-selling, to make it easier for individuals to borrow stocks for short-selling and increase the lending stock scale to 1.4 trillion KRW, 20 times the current level. The penalty for illegal short-selling will be raised from the current maximum fine of 100 million KRW to a surcharge within the range of the short-selling order amount, and fines will be increased to 3 to 5 times the amount of unjust gains.

Chairman Eun said, "Recently, with the revision of the Capital Markets Act, measures such as strengthening penalties for illegal short-selling and mandating the retention of securities lending information have been established." He added, "Foreign media have evaluated that strong systems have been introduced, and securities industry officials I met said that this level would deter illegal short-selling." However, he noted, "Our general investors say this is not enough, but I think the legal revision is significant."

◇Promise to Establish a Preemptive Prevention System Reversed Again=Currently, there is a strong voice among individual investors that 'short-selling should be completely abolished.' One individual investor argued, "Even if short-selling is expanded to some individual professional investors, the damage to the majority of small individual investors who cannot participate will only increase," and "It is difficult for individuals to win in the short-selling market, so the system should be abolished."

Above all, the failure to establish the illegal naked short-selling preemptive prevention system, which individual investors wanted, is controversial. Financial authorities have already reversed their promise to establish a naked short-selling prevention system twice. After the naked short-selling incident involving Goldman Sachs International in 2018, the Financial Services Commission imposed a fine of 7.5 billion KRW and promised to build a system to detect naked short-selling in real time. However, this system has not yet been introduced, and the current move to introduce it has effectively collapsed. Regarding this, Chairman Eun said, "Some criticism that we broke the promise to introduce an illegal short-selling blocking system is understandable," and added, "(However) I believe that the illegal short-selling monitoring system, which is post-detection in nature, can sufficiently detect illegal short-selling, though not as much as preemptive blocking." He also noted, "It is not impossible with Korea's IT system, but it involves a lot of labor and difficulties in practice."

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