Short selling brings perils

Although the stock market edged down yesterday from Friday, a renewed sense of optimism is buoying Seoul’s main bourse.

However, with foreign investors accounting for nearly 80 percent of all short selling, market experts have warned about the negative influence this could have on the local market.

According to the Korea Exchange, in the first half of this year short selling amounted to 19.3 trillion won ($17.06 billion). Of this, 15.4 trillion won was made up by foreign investors.

Short selling refers to the practice in which investors sell shares by borrowing them in anticipation of price falls. Short sellers can make profits by buying back shares at a lower price.

However, while this trend can prop up the main index, it also threatens to wreak havoc with the bourse if the global market performs dismally, sources said.

“Although foreign investors’ short selling does not exceed 80 percent, it is an influential trading force,” said an official at the Korea Exchange.

Overall, institutional investors make up roughly 20 to 25 percent of the short selling, while retail investors account for 6 to 10 percent.

Foreigners’ predilection for betting on Korean stocks tanking is considered one of the primary causes of the Kospi’s sharp fall in May, when the euro zone resurfaced and sent foreigners fleeing.

Market experts say it is crucial to monitor sudden concentrations of short selling to pre-empt problems.

Automobile and IT shares may have enjoyed a bullish rally this month but most struggled in the first half of the year. Samsung Electro-Mechanics and LG Innotek saw their stocks tumble more than 9 percent each after JP Morgan released a report advising investors to sell on Aug. 5. After this, the short selling on these companies grew significantly. Samsung Electro-Mechanics’ short selling amounted to 2.8 billion won the following day, but skyrocketed to 40 billion won on Aug. 6.

Short selling has long been a thorn in the side for financial authorities.

In October 2008, the government imposed a temporary ban on short selling in an effort to prevent the trading practice from battering the local bourse at the height of the global financial crisis. The restriction was lifted on non-financial stocks in June 2009.

The benchmark Kospi hit a yearly low of 892.16 in October 2008 after hitting a closing high of 2,062.92 a year earlier.

The Financial Services Commission said it will require investors to report any short selling volume above 0.01 percent of issued shares from late this month.

By Lee Ho-jeong, Yonhap [ojlee82@joongang.co.kr]