FSC takes aim at short-selling

Korea’s financial authorities are toughening regulations on short-selling in hopes of protecting retail investors from falling victim to the investment practice.

The Financial Services Commission said Wednesday that starting next month, it will suspend trading on shares that appear to experience excessive short-selling on a single trading day and increase fines on investors who violate short-selling regulations.

Short-selling is a practice where investors borrow shares and sell them off immediately on the assumption that the value will decline and therefore allow them to repurchase at a lower price. In Korea, the practice typically hurts smaller investors.

Stocks that have nose-dived more than 10 percent on a single day will be labeled as experiencing “excessive short-selling” depending on how much the amount of shorted stock accounts for the overall traded value.

Additionally, stocks that meet three specific conditions will be suspended the following day. They include: falling between 5 and 10 percent on a single trading day; shorted stock accounting for more than 18 percent of the stock’s overall value on the Kospi and 12 percent on the Kosdaq; and short sales of the stock increasing six times on the Kospi and five times on the Kosdaq.

Currently, the conditions are value dropping more than 5 percent in a single day; shorted stock accounting for 20 percent of the stock’s value on the Kospi and 15 percent on the Kosdaq; and short sales increasing more than twofold on both indexes.

The Financial Services Commission also plans to toughen the penalties against those who violate short-selling regulations. Currently, the regulatory agency applies different penalties depending on whether the violation was intentional or a mistake.

However, those penalties will be split into three decisions - intentional, light and heavy - which means a heavier penalty will be imposed for repeat offenses, even if they were unintentional. The maximum limit on the fine has been doubled to 100 million won ($88,000), with an additional 50 percent if the short-selling was done for unfair business gain.

“By widening the scope of shares labeled as experiencing excessive short-selling, we hope to strengthen alerts to investors and increase market stability,” the commission said. “We expect this move will contribute to establishing a fair trading order.”

Short-selling on the Korean market is still relatively smaller than in other markets.

Last year, short-selling accounted for 6.4 percent of all transactions on the Kospi and 1.7 percent on the Kosdaq. On the Japanese market, short-selling accounted for 39.4 percent, while in New York, it accounted for 42.4 percent.

Nonetheless, Korean financial authorities decided to toughen regulations after a spate of short-selling caught retail investors off guard. The latest case involved Korea’s biggest game developer, NCSOFT. On June 20, just an hour before the market closed, the company’s shares suddenly dropped in value, ending the day 11.41 percent lower than the previous session.

The company saw 1 trillion won of its market capitalization vaporize in a single day. Short-selling was considered the primary cause as shorted stock amounted to 196,256, much higher than the daily Kosdaq average of 16,710 in the first five months of this year.

However, investors were not warned of the significant increase in short-selling because the overall shares sold that day grew without exceeding the government’s standard for excessive short-selling.

The following day, the Financial Services Commission said it was investigating the game company on suspicions that insider trading led to the increased short-selling.

A similar phenomenon occurred on the Kosdaq last year with the biopharmaceutical company Celltrion, leading investors to call on financial authorities to strengthen regulations.

BY LEE HO-JEONG [lee.hojeong@joongang.co.kr]