Short-selling reporting measures under fire

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Short-selling reporting measures under fire


Short-sellers have long been blamed for distorting markets and passing on great risks for independent investors with less information and capital to handle.

To protect “ant investors,” or retail investors who make small investments in the stock market, and enhance transparency, financial authorities introduced short-selling reporting obligations last month, but the efficacy of the measure has already come under scrutiny just two weeks into implementation.

The Financial Supervisory Service (FSS), the nation’s financial watchdog, requires entrusted investment companies to publicly disclose details when they short-sell more than 0.5 percent of any listed company’s total outstanding shares or more than 1 billion won ($880,000).

Some analysts, however, note that the new measure would not effectively disclose the information the program targets.

“The aim is to reveal how much money is pouring into short-selling and who handles the short sale,” said Kim Dong-young, an analyst at Samsung Securities.

Short-selling refers to the selling of a security that the seller does not actually own, and it is made by the assumption that a security’s price will decline and will be purchased later at lower prices to gain the price differences.

“But the rule didn’t cover some types of transactions such as exchange-traded funds [ETF],” Kim said, “so if an asset management company short-sells ETFs, they would not count especially when the amount is big and companies hold a large quantity of long-position ETFs. ”

The FSS hopes to make the disclosure a warning against excessive short sales, but the volume of short-selling remains at levels similar to before the requirement went into effect. The information on the Korea Exchange website includes the names and addresses of brokerages, dates of transactions and traded equities, and daily volume of short-selling.

“The reported amount of short-selling [on Korea Exchange] will likely miss different types of short sales,” Kim said.

The amount of short-selling decreased the day of implementation, accounting for 3.98 percent of the main bourse Kospi. But it has since bounced back. The share stood at 5.77 percent on July 13, the latest data available.

The turnover of securities lending that often later translates into short-selling transactions also decreased shortly after the regulation announcement, but soon returned to the level before the reporting obligation. Between June 30 and July 8, the amount was less than 60 trillion won but surpassed 60 trillion won after July 11.

Market watchers say that the revelation of brokerage houses rarely affects the sentiment of actual short-sellers, since the securities companies are only entrusted entities.

“The vast majority of short-selling is done by foreign hedge fund managers,” said a source in the securities circle. “But they often use entrusted dealers through equity swaps, so they are not required to reveal their identity.”

As the source noted, the listed names largely consist of global and local fund managers including Samsung Securities as well as Morgan Stanley, UBS and Deutsche Bank. Still, global players handle a far larger number of deals compared to local outfits.

The government and financial regulators set out to monitor short-sellers, often considered culprits of market speculations that later prove wrong.

Retail investors often fall victim to the rumors, losing their money. The 10 most purchased equities in the Kospi from local investors had an average loss of 12.83 percent in the first five months, according to the Korea Exchange.

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