Avoid only April by-elections? ... 'Short-selling ban' extended again, allowed only for large-cap stocks from May (Comprehensive)

Other Stocks Face Indefinite Extension of Short Selling
Additional Large Share Volumes Secured to Expand Individual Short Selling
Illegal Short Selling Punishable by Up to 30 Years Imprisonment: "We Will Prevent Even Attempts"
Domestic Market Overheated Stock Designation System Makes Explosive Rises Like US GameStop Difficult

[Image source=Yonhap News]

[Asia Economy Reporters Ji Yeon-jin, Park Ji-hwan] From May 3rd, short selling will be allowed on stocks constituting the KOSPI 200 and KOSDAQ 150 indices. Originally, short selling was scheduled to resume on April 16th, but it has been extended by about 50 days with a partial resumption of short selling.

The Financial Services Commission (FSC) held its first emergency meeting on the 3rd and decided to extend the ban on short selling. Following the meeting, FSC Chairman Eun Sung-soo stated in a briefing, "During today's meeting, there was consensus that it is difficult to completely or indefinitely ban short selling, which is a global standard, in our internationally connected capital market environment," adding, "Given the significant market concerns and worries about the resumption of short selling, we decided to minimize market shocks through a partial resumption."

Short selling is a trading technique where stocks are borrowed and sold when a decline in stock prices is expected. The government banned short selling across all listed stocks in the domestic market for six months starting March last year due to the sharp stock price drop caused by the COVID-19 pandemic. This ban was extended once more for six months in August last year.

At the meeting, the FSC resolved to resume short selling starting with stocks included in the KOSPI 200 and KOSDAQ 150 indices. This decision considered that these stocks are familiar to both domestic and foreign investors, have high utilization in linked trading between the derivatives and stock markets, have large market capitalization, and high liquidity, which limits the price impact of short selling.

The KOSPI 200 accounts for 22% of the total 917 KOSPI stocks and represents 88% of the total market capitalization (KRW 2,060 trillion). The KOSDAQ 150 accounts for about 10% of the total 1,470 KOSDAQ stocks and approximately 50% of the total KOSDAQ market capitalization (KRW 392 trillion).

For the remaining stocks, the FSC will decide on the method and timing of resuming or banning short selling later, considering the effects and market conditions.

Some critics argue that the political sphere decided to further extend the short selling ban ahead of the April by-elections for Seoul and Busan mayors to consider the sentiment of the Donghak Ant movement investors. Chairman Eun explained, "If partial resumption of short selling is decided, it will take about two to three months to organize the system, introduce new programs, and conduct testing, based on feedback from the field."

The FSC plans to complete system construction and institutional improvements by May 3rd, when short selling partially resumes. Starting from the 6th of next month, penalties and criminal charges for illegal short selling will be enforceable, and to prevent attempts at illegal short selling in advance, the loan transaction information for short selling purposes will be mandated to be stored electronically for five years, which they are preparing for.

Individual investors oppose the resumption of short selling, advocating for the early introduction of a real-time short selling monitoring system. Chairman Eun said, "It is not technically impossible to have a real-time monitoring system," but added, "There were concerns that real-time information processing could slow down stock trade executions and cause system overload, which is why it was not introduced at the time of the law revision."

He further stated, that the detection cycle for naked short selling has been shortened from six months to one month, and with the development of detection methods, illegal short selling detection and monitoring have been strengthened, so illegal short selling is expected to disappear. He said, "Since illegal short selling can be punished with imprisonment from one year up to 30 years, if the system is well operated, illegal short selling can be blocked."

The FSC also plans to prepare measures to expand participation by individual investors, who criticize short selling as a "tilted playing field" dominated by institutions and foreign investors. Having already secured about KRW 2 to 3 trillion worth of loanable stocks from securities firms, and with the resumption of short selling covering most stocks in the KOSPI 200 and KOSDAQ 150, it is expected that individual investors' short selling will be revitalized. Chairman Eun emphasized, "We will continuously secure loanable stocks through cooperation with various institutions and encourage the participation of all securities firms handling margin loans to continuously improve accessibility and convenience for individual short sellers."

Regarding the recent anti-short selling movement triggered by the US video game retailer GameStop, Chairman Eun said, "We have a system that temporarily prohibits short selling on overheated stocks if prices fall strangely or if certain forces are concentrated," adding, "Unlike the US, where daily price fluctuations are unrestricted, such volatile behavior patterns are unlikely to occur here."

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