Measures Against Short Selling Proposed... But Fierce Criticism Ensues

Market Maker Short Selling Restrictions
Inspection Cycle Shortened to 1 Month

Market Maker Self-Regulation Criticized
Authorities Must Switch to Direct Monitoring

Emphasis on Same-Day Checks
for Suspicious Naked Short Selling Transactions

[Asia Economy Reporter Park Jihwan] Financial authorities have introduced measures to restrict short selling by market makers (securities firms), who have faced investor distrust, and to shorten the inspection cycle for illegal naked short selling from six months to one month. These improvements in the short selling system come in response to investors' concerns about market makers' abuse and privileges, as well as the lack of a monitoring system for illegal short selling. However, the market has criticized these measures as merely half-hearted, calling for additional supplementary measures.

◇ Restricting Market Makers' Short Selling... Full Application of the Uptick Rule = On the 20th, the Financial Services Commission and Korea Exchange announced plans to improve the market maker system and strengthen the detection of illegal short selling. The plan includes a complete ban on short selling in the stock (spot) market by market makers in the Mini KOSPI 200 futures and options market, where short selling accounts for a high proportion. This is because losses can be hedged (risk avoided) using other derivatives such as KOSPI 200 futures and options. The market maker system helps investors trade smoothly by quoting both buy and sell prices for stocks with sluggish trading. This increases trading volume and prevents rapid price fluctuations. In this process, short selling has been allowed to hedge losses incurred by market makers.

The Financial Services Commission also decided to abolish the exemption clause for market makers under the uptick rule. The uptick rule prohibits submitting short sell orders at prices equal to or lower than the last transaction price to prevent stock prices from falling due to short selling. For example, if stock A was last traded at 50,000 KRW, short sell orders must be placed at 50,050 KRW, 50,100 KRW, etc. The Financial Services Commission expects this measure to reduce market makers' short selling by 42%.

The plan also includes shortening the inspection cycle for detecting illegal naked short selling from six months to one month. Currently, inspections are conducted every six months on selected targets notified by securities firms, but this period will be shortened to tighten the monitoring network.

◇ "Like Leaving Fish to the Cat"... The Inspection Authority Must Change = Individual investors have criticized the self-audit of market makers in the authorities' recent system improvements. Recently, the Korea Exchange conducted a special audit of all trading records of market makers over the past three years and six months. Although several suspected cases of naked short selling and uptick rule violations were detected, the exchange explained that most were due to technical errors or mistakes. This has led to remarks in the market that it is "like leaving fish to the cat," questioning whether the exchange can properly monitor securities firms, which are its major shareholders. Jeong Eejung, head of the Korea Stock Investors Association, said, "It is ridiculous that the exchange operating the market maker system directly audited securities firms that are its shareholders," and argued, "The financial authorities should take direct action to establish a structure for inspecting illegal short selling."

The inspection cycle for short selling is also controversial. The financial authorities plan to inspect suspected naked short selling transactions where settlement stocks have not been delivered to securities firms by 12 noon on the settlement day, two business days after the trade, on a monthly basis instead of every six months. However, investors point out that if a real-time verification system is difficult to implement, at least abnormalities should be checked on the same day after market close. One individual investor said, "According to current regulations, even if an incident occurs, detection will take about a month, and penalties will take about a year," adding, "Since neither the authorities nor the exchange compensates for damages first, individual investors bear the losses entirely."

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