[Column] The Market's Enemy Is Uncertainty, Not Short Selling

The unexpected temporary ban on short selling is causing controversy. Individual investors who have long suffered from short selling welcome the move. However, it could become an obstacle to the advancement of the stock market, such as inclusion in the Morgan Stanley Capital International (MSCI) Developed Markets Index. In particular, the Financial Services Commission, which has consistently maintained a policy of fully resuming short selling, has succumbed to pressure from the ruling party ahead of next year's general election. This has led to criticism that it is a populist policy aimed at winning favor.

This is the fourth time in history that short selling has been artificially banned in the South Korean capital market. The first was during the global financial crisis in October 2008, and the second during the European debt crisis in August 2011. The third ban on short selling came in March 2020, coincidentally just one month before the 21st National Assembly election. However, at that time, there was hardly any criticism that it was for election purposes. This was because the COVID-19 crisis was a clear risk factor, and other countries overseas also temporarily banned short selling around the same time to stabilize their markets.

The reason why this fourth ban on short selling is puzzling lies here. It is neither a financial crisis nor a pandemic situation, yet the financial authorities made a 'surprise' announcement of the short selling ban. The reason is likely to appease the angry sentiment of individual investors who poured funds into the secondary battery theme this year.

In 2008 and 2011, foreign investment funds traded in the domestic stock market were on the order of 300 trillion won annually. In 2021, it surpassed 1,000 trillion won for the first time. The increase in foreign trading volume is an indicator of the globalization level of the capital market.

However, it is questionable whether the system is adequately supported as the market has grown. Short selling is a system operated in most advanced financial countries. What the authorities raised as a problem this time was illegal practices such as naked short selling. Fixing flaws in the system and blocking the system itself are completely different matters. The securities industry laments that "the policy is too extreme."

Above all, the concern is the perception of overseas investors toward the Korean capital market. The uncertainty that capital market-related policies can be reversed at any time due to political logic has increased. Concerns that policies may waver every time there is a general or presidential election are bound to grow.

What capital market participants dislike most is 'uncertainty.' Due to this measure, the domestic stock market showed unprecedented volatility. Moreover, there is a high likelihood that there will be another heated debate about whether to extend the short selling ban six months from now. Uncertainty caused by populist policies in the capital market is a more frightening enemy than short selling itself.

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