Financial Services Commission Restricts Market Maker Short Selling... Full Application of Uptick Rule

[Asia Economy Reporter Ji-hwan Park] The financial authorities have decided to significantly restrict short selling by market makers such as securities firms. The regular inspection cycle for illegal short selling will be shortened from the current six months to one month, and a monitoring system for illegal short selling will also be established.

On the 20th, the Financial Services Commission announced the 'Market Maker System Improvement and Strengthening Measures for Detecting Illegal Short Selling' based on these points.

The FSC first decided to limit short selling by market makers to unavoidable cases. Short selling in the stock market by market makers in the Mini KOSPI 200 futures and options markets, where short selling ratios are high, will be completely banned. An FSC official stated, "Considering that there are other hedging instruments such as KOSPI 200 futures and options," and added, "It is estimated that this measure will reduce short selling by market makers by 42% compared to the current level."

The market maker system is a system in which 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. Above all, it functions to mitigate sudden price fluctuations. Currently, 22 companies are engaged in market making.

The FSC decided to abolish the exemption from the uptick rule (a system that prohibits selling stocks short at a price lower than the market price) that had not been applied to market makers until now. It also plans to encourage the advancement of internal control systems such as a no-borrow short selling monitoring system and an automatic extraction system for violations of the uptick rule.

Furthermore, a graduation system for market makers will be implemented, allowing them to exit from market making stocks once a certain level of liquidity is secured. Market makers will be required to participate mandatorily in at least 60% of stocks with low liquidity. Along with this, disclosure of detailed market making transaction details, including the status of market making contracts, will be expanded.

The inspection cycle for illegal short selling will also be shortened. Currently, when a short seller places a sell order, the securities firm checks whether the stocks have been delivered two trading days later and notifies the exchange if they have not been delivered. The exchange collects these notifications and checks for illegal short selling every six months, but this inspection cycle will be shortened to one month.

The FSC will establish a post-detection monitoring system as an alternative to the real-time illegal short selling system, which was concluded to be inefficient in terms of cost-effectiveness. A short selling monitoring system will be built to utilize information related to borrowed short selling quotes for market surveillance purposes. In this system, when securities firms submit quotes to the exchange, they will indicate whether the sale is a general sale, borrowed short sale, or other sale, as well as whether the transaction is exempt from the uptick rule, and whether the investor is a foreign investor or a market maker.

The FSC stated, "We will continuously inspect whether market makers violate the uptick rule exemption for short selling orders, and establish an organization within the Exchange Market Surveillance Committee dedicated to continuous monitoring and inspection of illegal short selling."

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