Debate on short selling rages as ban is set to end

Finance

Published: 16 Aug. 2020, 18:00

Debate on short selling rages as ban is set to end

Professor Lee Dong-youp explains short selling on Thursday at the Korea Federation of Banks' building in Jung District, central Seoul. [KOREA EXCHANGE]

With Korea's ban on short selling set to end in the middle of September, a debate is raging as to whether the practice should be allowed again given the volatility in the markets and a sense that investors betting on a fall could cause one.

Retail investors have claimed the system should be banned for good to level the playing field between them and institutional and foreign investors. Analysts counter that the system should stay, arguing the Korean stock market is becoming less attractive to foreign investors.

In short selling, shares are borrowed and then sold immediately, on the hope they can be bought again at a lower price to repay the stock loan.

The ban on short selling was announced by the Financial Supervisory Service on March 13 and was scheduled to last six months. All Kospi, Kosdaq and Konex shares are covered by the restrictions.

The Korea Exchange held a public discussion about the system Thursday at the Korea Federation of Banks' building in Jung District, central Seoul.

Panelists representing the interests of retail investors repeatedly mentioned that short selling creates an uneven playing field, as the information and methods needed to profit from a fall in the price of stocks are not readily available to the average person.

“There’s one thing all the audience here will admit. No retail investor is able to short sell here in Korea. Such inequality should be fixed, but it is nearly impossible to do that when short-selling comes back, so we need to extend the ban,” said Kim Dong-hwan, a financial influencer with a YouTube channel called "ThreeProTV" (translated).

Kim Sang-bong, an economics professor at Hansung University, agreed on extending the ban, claiming that if short selling resumes, money will start moving into the real estate market, or in the worst-case scenario, to other countries.

“It has been a while since short selling became a playing field for foreign investors. Once the system comes back, the real estate market will start to move up and down or the money will go out to international markets. This is why we need to extend the ban and inspect the system,” professor Kim said.

Jung Eui-jeong, the head of Korea Stockholders Alliance, was in support of an extension and mentioned the results of a survey.

“Seven out of 10 people in Korea answered that the short selling system causes harm to individual investors, with 63.6 percent of the people favoring an extension to the ban and 38 percent saying the system should disappear,” he said.

Analysts and economists are inclined to support an end to the band.

Panelists debate the regulation and effects of short selling on stage at the Korea Federation of Banks' building in Jung District, central Seoul, Thursday evening. [KOREA EXCHANGE]

“It is impossible to empirically prove short selling’s impact on market volatility. Even though the market has become more stable after the ban, we cannot say for sure that was because of the ban on short selling or was from other factors,” said Bin Ki-beom, an economics professor at Myongji University.

Hwang Sei-woon, a research fellow at the Korea Capital Market Institute, added that there is no single answer, even among researchers, on whether short selling increases market volatility.

No clear consensus emerged as to whether foreign and institutional investors actually have an upper hand in terms of short selling.

Jung from the Shareholders Alliance described the local stock market as basically an ATM machine for foreign investors, saying that “retail investors suffer huge losses that go beyond the imagination and are completely defeated against their foreign counterparts.”

He argued that it is time to “level the playing field and extend the ban for an additional six months."

Bin from Myongji University call the argument a “rational generalization.”

“There are many international private equity funds [that made short investments] but left the country because they suffered huge losses even during the 1997 financial meltdown,” said Bin. His comments were later hailed by a person from Shinhan Investment & Securities who said that many foreign investors also suffer losses from short sales and that it’s a “misconception” to think foreigners always win.

Analysts said the actual problem may be in terms of accessibility, not the system itself.

“Short selling is very similar to stock investments through credit loans, but it just works in the opposite direction. The problem is that retail investors do not have equal access to the system. There is barely any market for retail investors to practice short selling. Less than 1 percent of them actually do it,” Hwang said. As a solution, he proposed the Japanese model, where 25 percent of retail investors are short sellers.

Hwang also mentioned that the extension of the ban may continue to inflate the stock market, which is already showing signs of being a bubble.

“The real economy has not recovered back to pre-coronavirus levels; however, the benchmark Kospi index is just inches away from reaching the 2,500 mark. While there are other measures to cool the overheated market, short selling is the most effective,” he said.

YouTuber Kim said he “disagrees” with Hwang’s assessment of Korea’s economy and said Korea has the “healthiest economic growth rate” and the stock index is at “an understandable level.” He also added the government should not go back to the unfair market structure just because of concerns about overheating.

Ten countries including Korea have banned short selling after the spread of Covid-19.

The duration of the ban was different for each country. Taiwan and Italy originally planned for three months but did not go the full three months. Malaysia originally planned to stop short selling for one month but decided to extend the ban until the end of the year.

In Europe, Greece, Austria, Belgium, France and Spain banned the practice for two months.

BY MOON HYEON-KYUNG, KANG JAE-EUN [kang.jaeeun@joongang.co.kr]