A risky extension of the ban

The Financial Services Commission (FSC) has pushed back the lifting of a ban on stock short selling to May 3, the second time after an earlier delay in September in removing the ban which had been imposed since March last year to lessen the Covid-19 fallout on the stock market. If the ban on short selling is extended once again, it would be imposed for 14 months, possibly causing side effects on the market.

Short selling is a legitimate investment strategy of selling borrowed stocks with a bet on an expected fall in the prices and later buying them back at a cheaper price to profit. The mechanism helps remove some of the bubbles in the shares of overrated companies.

The FSC earlier maintained that short selling would resume on March 15 as planned. If the ban goes on longer, authorities would have worried about a capital flight from foreign and local institutions as short selling serves as a leveraging tool for institutional investors against market volatility. The extension could be perceived as a political decision made ahead of the April 7 mayoral by-elections in Seoul and Busan at a time the country is swept up in a stock fad.

Retail investors who became a primary force behind the stock market have been campaigning for the ban on short selling, citing big capital’s potential abuse of it. Many institutional players have used their capital to go short on small-cap stocks to make a profit. They often push the stock prices lower with heavy selling and buy them back cheaply. The ruling Democratic Party tried not to upset retail investors by easing their stock income tax last year. The recent feat of retail investors against hedge funds over the GameStop shares on Wall Street also helped embolden individual investors in Korea.

If there are flaws in the current short-selling system, they should be addressed. That’s why the FSC expanded retail investors’ access to short sale by increasing the number of stock brokerage firms dealing with retailors’ short sale to 10 from six, for instance.

Punishment on illicit stock trading was also hardened. If the FSC succumbed to political pressure and decided to extend the ban on short selling for two more months, it must cancel the extension. If side effects appear in the stock market sooner or later, would the FSC take responsibility? Political pressure must not sway market policies.