Short selling of some stocks will be allowed from May 3

Finance

Published: 03 Feb. 2021, 19:02

Short selling of some stocks will be allowed from May 3

Financial Services Commission Chairman Eun Sung-soo announces the financial authority's decision on the short selling at the government complex in Seoul on Wednesday. [YONHAP]

Korea is splitting the difference on short selling, allowing the practice for some shares and not for others.

The decision comes after a turbulent two weeks in which short positions in the United States were attacked by internet mobs, and just a few days after a group in Korea threatened to do the same.

Financial Services Commission (FSC) Chairman Eun Sung-soo on Wednesday said the financial authority will lift the ban on the short selling of shares on the Kospi 200 and Kosdaq 150. The change is effective May 3.

That’s 22 percent of the 917 Kospi shares and 10 percent of the 1,470 Kosdaq shares. The prohibition on the short selling of the 2,037 stocks will continue without a specific end date.

“Since short selling has been banned, there have been various arguments including a complete ban [on short selling], a complete resumption and those that proposed of resuming [short selling] after regulatory improvement,” Eun said. “The commission members have reached an agreement that short selling is a global standard with international connections, and therefore it is difficult to impose an unlimited suspension or a complete ban.”

He noted that Korea is the only country among “advanced countries” to ban short selling and that short selling plays a significant role in evaluations by global institutions such as Morgan Stanley Capital International and the Financial Times Stock Exchange.

“However, as there are concerns over resuming short selling, we have decided to minimize the impact on the market by partially resuming short selling,” Eun said.

Short selling is when an investor borrows stock and sells that stock immediately in hopes of buying it back later at a lower price, repaying the loan and profiting from the difference. It has been prohibited since March 2020 in Korea as stock prices plunge.

The FSC in January announced that it would not extend the ban and that the practice would be allowed again from March, saying that it would strengthen penalties against illegal short selling.

The strengthened penalties, which include jail sentences of up to a year and fines of up to five times the financial losses caused, will still be implemented. They will be effective April 6.

The FSC also promised to level the playing field to facilitate short selling by retail investors, as the practice is complicated, expensive and has been dominated by institutions.

The FSC backtracked on its decision to extend the restrictions following demands from retail investors and lawmakers from the ruling Democratic Party.

Many people believe that short selling can cause the price of shares to fall, and the fear was that the current rally would come to an end if the shorts were allowed to return. Politicians were particularly worried about damaging sentiment ahead of the mayoral elections in Seoul and Busan.

Retail investors have been the primary force in driving up stocks since late last year.

The Kospi, which ended at an all-time record last year, has continued to rally, jumping beyond the 3,000-threshold for the first time on Jan.7. While foreign and institutional investors have been offloading, retail investors have continued to pile in, some even taking out loans to fund the purchases.

The bull attack on GameStop has played into such arguments, and the threat of runs on Celltrion further reinforced concerns.

According to Korea Exchange, the short position on Celltrion dwarfs all others, as the balance is 2 trillion won ($1.79 billion). Samsung Electronics has 314.5 billion won in short positions and Samsung Biologics 310 billion won.

The FSC chairman during the briefing said he wasn’t concerned of a GameStop-like rally in Korea, as the markets have daily limits.

“We have a maximum ceiling of 30 percent limiting the daily volatility, which is different from the United States,” Eun said.
He added that the Korean government has a system in which short selling can be halted in the case of unusual price movements.

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