"Short Selling is Stock Price Manipulation" Listed Company CEOs and Individual Shareholders Angry... Foreigners Playing Around, Fundamentals Weakened

"It is problematic that some experts consider short selling as a perfect entity beyond critical scrutiny, but even if we acknowledge the positive functions of short selling, the current short selling practices in South Korea are almost identical to stock price manipulation in behavior, so a thorough review of the system is absolutely necessary."

[Asia Economy Reporter Lee Seon-ae] CEO A of a listed company expressed frustration. He said, "I agree with shareholders' suspicions that short selling forces intentionally drive stock prices down," and clicked his tongue, adding, "I have actually witnessed such behavior for a long time." His argument is that short selling in the Korean stock market does not profit from overvalued stocks returning to their proper value. CEO A sympathized with the recent voices of individual investors calling for a ban on short selling, saying, "I feel that neither shareholders nor companies are protected by the state."

Recently, the controversy over short selling has heated up. When Kim Ju-hyun, the newly appointed Financial Services Commission chairman on the 11th, stated at a press conference that "depending on market conditions, banning short selling is also possible," the issue flared up even more.

According to the financial investment industry on the 19th, individual investors have continuously filed complaints with the Financial Services Commission, the Prime Minister's Office, the Ministry of Economy and Finance, political parties, and lawmakers' offices, and have held more than 40 rallies and protests this year alone. Are they the only ones hoping for a temporary ban and system improvements on short selling?

CEO B of a listed company asked the reporter, "If, over several years, the same securities firm's trading desk repeatedly forms stock prices within 30 minutes after market open and 30 minutes before market close for a specific stock, or repeatedly buys at high prices and sells at low prices, or continuously attempts to lower the stock price by releasing large volumes despite major positive news, wouldn't that be the same as the usual stock price manipulation we have seen, just with a different position?" He sighed, saying, "It is clearly visible to ordinary people (individual shareholders), but I don't know if the regulatory authorities can't see it or don't want to see it," and added, "Even when we request a detailed investigation, the only response we get is that 'short selling is a global standard.'"

Shareholder C of this company raised his voice, saying, "Short selling can easily earn hundreds of billions of won from just one malicious rumor," and added, "If the stock price falls due to a malicious rumor but no investigation is conducted, and if the biggest beneficiary of such rumors is short selling, isn't it logical that where there is profit, there is intent?"

"When we claimed that there seemed to be many naked short sales, the regulatory authorities responded that 'it is impossible in the system and cannot happen.' However, the incident where an enormous number of phantom stocks were deposited to securities firms' employees showed that naked short selling is indeed possible."

CEOs and shareholders of companies targeted by short selling distrust the short selling system. A CEO of a KOSDAQ-listed company, referring to a stock deposit incident at a major securities firm a few years ago, said, "We raised suspicions that illegal short selling with price manipulation is still rampant and requested improvements, but since we believe it will not be improved anyway, we decided not to mention it further," and lamented, "We hope for system improvements but do not expect them."

Short selling is an investment strategy where stocks are borrowed and sold. Since the stocks are borrowed, they must be returned eventually. Therefore, after short selling, the investor must buy back the stocks, and the investor profits if the stock price falls during this process. This is the background for suspicion that the short selling system and its investors are the main culprits of stock price declines.

KOSPI200 Newly Included Stocks Face ‘Short Selling Nightmare’

Individual investors consider short selling the main cause of stock price declines and demand a ban. However, the financial authorities state that the correlation between short selling and stock prices is not clear. According to the financial authorities' investigation of the correlation between short selling transaction amounts and the index during rising and falling periods, from January 2020 until March 13, before the short selling ban was implemented, the correlation between short selling and the KOSPI during the decline period was -0.39. During the rising period after partial resumption of short selling from May 3 last year, when the KOSPI reached an all-time high, the correlation was -0.44. The correlation coefficient's absolute value closer to 1 indicates a stronger correlation, and a negative coefficient indicates an inverse correlation. In other words, short selling increases when stock prices fall, but the correlation is low.

Even if the correlation between the index and short selling is not strong, it is difficult to assert that there is no correlation at all when looking at individual stocks. The stock prices of stocks newly included in the KOSPI200 index on the 10th of last month fell by up to 35% as of the 15th compared to May 31. Hana Tour (-35.27%), Hanil Cement (-34.10%), Iljin Hysolus (-28.57%), K Car (-25.45%), and Meritz Fire & Marine Insurance (-20.31%) recorded double-digit declines. Compared to the KOSPI's 13.2% drop during the same period, this is a 2 to 3 times larger decline.

The market suspects short selling as the main cause of the sharp declines. When the government resumed short selling in May last year, it limited it to large-cap stocks in the KOSPI200 and KOSDAQ150 indices. These stocks, newly included in the KOSPI200 on the 10th of last month, became eligible for short selling, making them prime targets for short selling forces aiming to profit from stock price declines, according to securities industry analysis.

In fact, these stocks ranked within the top 20 in short selling transactions on the day they were newly included in the KOSPI200 index. Iljin Hysolus had a short selling transaction ratio of 54.93% that day, meaning half of the trading volume was short selling. Other stocks such as K Car (45.12%) and Hana Tour (33.41%) also had short selling ratios between 20% and 40%.

Foreign Influence Expands: "The Direction of System Improvement Itself Is Wrong"

Individual investors do not solely blame short selling for the domestic stock market crash. They also consider external factors such as inflation, major countries' interest rate hikes, and Russia's invasion of Ukraine as negative influences on the decline. However, they argue that short selling has caused undervaluation (discounting) of the Korean stock market, leading to excessive declines, and thus demand a temporary ban on short selling while raising their voices for system improvements.

They point out the problem of a ‘tilted playing field.’ Recently, the proportion of foreign investors' short selling transactions in the KOSPI has hovered around 80%. On the 5th of this month, the foreign investor ratio reached 80.24%. Lee Kyung-soo, a researcher at Hana Securities, pointed out, "On average, foreign investors account for 75% of short selling transactions, but recently it has exceeded 80%, an absolute situation." Meanwhile, individual investors occupy only about 2%. He warned, "In a situation where institutional and individual supply and demand are limited, foreign influence is actually increasing. Foreign-based short selling nullifies the fundamental standards that should be key in determining stock prices, making alpha plays by institutions and individuals ineffective."

The authorities maintain that the tilted playing field is a misunderstanding. Regarding the repayment period, individuals can extend the maturity indefinitely unless unavoidable. They also say there is room to change the collateral ratio. The Financial Services Commission is considering lowering the individual short selling collateral ratio from the current 140% to align with institutions and foreigners (105%).

However, there are criticisms that the direction of the authorities' system improvement itself is wrong. Instead of loosening individual short selling regulations to match those for institutions and foreigners, the regulations on institutions and foreigners should be strengthened to the level of individuals. Professor Kim Sang-bong of Hansung University pointed out, "Even if individual regulations are loosened, retail investors cannot compete with institutions and foreigners in terms of information and capital strength."

The Korea Stock Investors Association, with about 51,000 individual investors as members, raised their voices, saying, "The repayment period for foreigners and institutions should be changed to 90 days, the same as individuals, and clauses such as banning re-short selling for one month after repayment are necessary." They also emphasized, "The short selling collateral ratio applied to foreigners and institutions when borrowing stocks should be raised to 140%."

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