US Gamestop Justified Partial Resumption of Short Selling in May

[Image source=Yonhap News]

[Asia Economy Reporter Ji Yeon-jin] "It has also been revealed that some hedge funds that shorted the recently surging (U.S.) 'GameStop' stock have suffered massive losses."

On the 3rd, when the Financial Services Commission announced an additional extension of the short-selling ban, five institutions including the Korea Exchange, Korea Securities Depository, Korea Securities Finance Corporation, Korea Financial Investment Association, and Koscom released a 13-page explanatory document titled 'This is the Fact about Short Selling.' This was to systematically refute the arguments for abolishing short selling that individual investors have been making through social network services (SNS) since last year.

In the explanatory document, the Korea Exchange addressed individual investors' claims that "short sellers are making excessive profits in the market, causing harm to individual investors," stating, "The claim that short sellers always profit is incorrect," and added, "Like general investors, short sellers can also incur losses." In fact, theoretically, the loss range in short selling is unlimited, making it a riskier investment method than regular buying, where losses are limited to the invested principal.

While the stock price cannot fall below zero after purchasing shares, the stock price after short selling can rise infinitely, meaning the short seller's loss (selling price - buying price) can be unlimited.

The Korea Exchange stated, "In fact, recent cases in the U.S. where short sellers have suffered large-scale losses have been reported in the media," introducing last year's losses of $40.1 billion (approximately 44 trillion KRW) by Tesla short sellers, $6.7 billion (approximately 7.4 trillion KRW) by Apple short sellers, $5.8 billion (approximately 6.4 trillion KRW) by Amazon short sellers, and the case of GameStop, which surged this year.

GameStop, a U.S. video game retailer, is a stock whose price rose 1500% as individual investors bought shares. U.S. individual investors organized 'WallStreetBets' to counter short sellers and designated GameStop as an anti-short-selling stock. As GameStop's stock price skyrocketed, hedge funds that had borrowed and sold the stock short had to buy back the shares at much higher prices, incurring huge losses. Melvin Capital, a hedge fund that fought a 'short-selling war' with individual investors, is reported to have lost more than half of its assets.

The Korea Exchange said, "Regarding the claim that short selling causes stock price declines, there has been no theoretical or empirical verification of its validity so far," adding, "There was no significant difference in stock price increases between countries that banned short selling during COVID-19 and those that did not." Major advanced financial countries such as the U.S., the U.K., and Japan did not impose short-selling bans during the stock price crash caused by the COVID-19 crisis, believing that short selling would not cause stock price declines.

Also, the proportion of short-selling transactions in domestic stock trading is only around 4%, which is small compared to major countries like the U.S. and Japan, where it is around 40%.

Meanwhile, regarding individual investors' concerns that "there is no system to detect naked short selling between institutions," the Korea Financial Investment Association responded, "Under the current Capital Markets Act, when an investor submits a stock sell order to a securities firm, the firm is obligated to verify whether the order is a short sale and whether settlement is possible for that short sale order," adding, "According to the Korea Financial Investment Association's model regulations, before accepting a short sale order, the securities firm confirms the list of lenders and settlement execution plans."

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