Which Stocks Saw a Surge in Loan Balance Ahead of Short Selling Resumption Next Month?

[Asia Economy Reporter Ji Yeon-jin] As short selling, which had been banned since March last year, is set to resume from the 3rd of next month, there are warnings to be cautious of stocks with rapidly increasing loan balances recently.

According to the securities industry on the 25th, the short selling targets resuming from the 3rd of next month are 200 KOSPI and 150 KOSDAQ stocks. However, since the government strengthened short selling regulations during the ban period, it is expected that indiscriminate short selling like before will be difficult to occur.

In April this year, the Capital Markets Act was amended to introduce fines and criminal penalties for illegal short selling, and loan transactions must be conducted through a computerized system with transaction records mandatorily kept for five years. Also, investors who short sell within the announcement and pricing period of a paid-in capital increase are prohibited from participating in the capital increase.

The short selling environment is also challenging. This year, companies are expected to improve earnings as the shock from COVID-19 subsides, and domestic and international economic recovery is becoming visible. Massive liquidity has flowed into the financial market, and since the short selling targets are composed of mid-to-large cap stocks, the relationship between investors and market forces is tense, so indiscriminate short selling could rather face counterattacks.

Before the short selling ban in March last year, foreign investors accounted for 70% of total short selling transactions. Institutional investors accounted for 30%. In the KOSPI market, foreign investors traded an average daily short selling volume of 197 billion KRW from 2019 until March last year. Domestic institutional investors recorded an average daily short selling volume of 148 billion KRW. During the same period in the KOSDAQ market, foreign investors recorded an average daily short selling volume of 82 billion KRW.

Jeon Gyun, a researcher at Samsung Securities, predicted, "If short selling resumes, foreign and institutional investors will lead short selling, but since the system and institutional improvements have been made to provide 'loan services' to individual investors, short selling transactions by individual investors could also hold a significant share."

The securities industry interprets stocks with rapidly increasing loan balances this month compared to last month as having secured shares for short selling before the resumption of short selling transactions in May.

Loan transactions involve borrowers paying certain fees and collateral to institutional investors and others to borrow stocks, then later returning the same stocks to the lenders. Since loaned stocks can also be used for short selling, loan balances are recognized as a leading indicator of short selling. However, not all loan balances are used for short selling. It is highly likely that borrowing occurred for short selling in the market-making process of stocks and derivatives conducted by financial investment firms.

Also, loan transactions can involve borrowing stocks not only for short selling but also for hedging derivative positions, and borrowing can occur for settlement fulfillment.

However, there are warnings to be cautious of stocks with increasing loan balances ahead of short selling.

Looking at the transaction status between lenders and borrowers from last month to this month, foreign investors borrowed 137.4 million shares in the KOSPI market, and financial investment firms borrowed 81.6 million shares. The entities lending stocks were foreign investors with 123.9 million shares, financial investment firms with 66.4 million shares, and trust funds with 28.7 million shares. The total loan transactions among foreign investors, financial investment firms, and trust funds amounted to 219.1 million shares, with foreign investors borrowing 78% of their loan volume from other foreign investors. Financial investment firms borrowed 45% on their own, 35% from trust funds, and 20% from foreign investors.

Especially among the KOSPI 200 constituent stocks, those with a high increase rate in loan balances compared to the end of March saw loan balances increase by 30% to 80%. These stocks had an average loan balance of 2.7% relative to their listed shares. Researcher Jeon said, "Since it is still a period when short selling is not allowed, loan transactions for short selling purposes in Korea are likely limited to market-making transactions by financial investment firms," adding, "Loan transactions by other investors could be for purposes other than short selling or for position securing ahead of the resumption of short selling."

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