"Foreigners Holding Up to 80% in the Short Selling Playground" Angry Retail Investors... Temporary Ban Policy Possible?

Foreign Short Selling Accounts for Over 80% of KOSPI Market This Month
Short Selling Exceeds 5% of Trading Volume in KOSPI Market

[Image source=Yonhap News]

[Asia Economy Reporter Lee Seon-ae] The voices of the ant army (individual investors) demanding a temporary ban on short selling are growing louder. They claim that the stock market is plummeting due to the impact of short selling and that short-sold stocks are falling more sharply than the market index, fueling public opinion for a ban. Even the securities industry is expressing concerns that foreign investors' influence on short selling is increasing, raising expectations for a temporary ban policy.

According to the Korea Exchange on the 13th, the proportion of foreign short selling transactions in the KOSPI market recently exceeded 80%. This is why there is a joke that the Korean short selling market is a playground exclusively for foreigners. On the 1st of this month, the foreign proportion was 72.04%, 72.86% on the 4th, and it rose to 80.24% on the 5th. It was recorded at 78.53% on the 7th and 75.09% on the 12th. Lee Kyung-soo, a researcher at Hana Securities, pointed out, "On average, foreigners account for 75% of short selling transactions, and this month it has exceeded 80%, indicating an absolute situation." In contrast, individuals occupy only about 2%. On the 12th, the individual proportion was 3.07%. Based on the recent one-month period (June 10 to July 12), the average short selling transaction proportions were 74.74% for foreigners, 22.36% for institutions, and 2.88% for individuals.

Since the beginning of this month, short selling has accounted for more than 5% of the total trading volume in the KOSPI market. Therefore, the monthly average is also expected to exceed 5%. The researcher pointed out, "Since the resumption of short selling in May, the average proportion was 3.8%, but it has now risen to over 5%."

Last month, the average short selling transaction proportion in the KOSPI was 5.27%, noticeably higher than 4.17% in February, 4.38% in March, 3.91% in April, and 4.98% in May. In the same month, the average short selling transaction proportion in the KOSDAQ market was 1.92%, showing a slight increase from 1.63% in March, 1.81% in April, and 1.89% in May. This is similar to the level just before the short selling ban was imposed in February 2020. At that time, the short selling transaction proportions for KOSPI and KOSDAQ were 6.71% and 2.39%, respectively. For KOSPI, the difference is 1.44 percentage points, and for KOSDAQ, only 0.47 percentage points.

Warnings are also coming from the securities industry. The researcher said, "During periods of increased index volatility, a surge in short selling amid a lack of supply and demand foundation can cause further index declines. Especially, foreign-based short selling undermines the fundamental criteria that should be key in determining stock prices, rendering institutional and individual alpha plays ineffective," adding, "This destroys the market's self-correcting ecosystem."

He continued, "In a situation where the supply and demand of institutions and individuals are inevitably limited, the influence of foreign short selling is rather increasing. If the authorities recognize the correlation between short selling and the index, there is sufficient possibility of a temporary ban policy on short selling, which is a tilted playing field favoring foreigners."

However, opinions differ regarding the impact of short selling. Financial authorities believe that the correlation between short selling and stock prices is not high. They report that there is no noticeable correlation between short selling and stock prices not only in the index but also in individual stocks. However, Financial Services Commission Chairman Kim Ju-hyun has stated that if necessary, a temporary ban on short selling would be implemented, sparking debate.

The Korea Stock Investors Union, with about 51,000 members, raised their voice, saying, "Foreigners, who account for 70-80% of short selling transactions, are manipulating the domestic stock market through short selling," and urged, "The authorities need to investigate the actual situation."

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