Ban on short selling to be partially lifted next week

Korea's financial regulator is set to partially lift a ban on short selling of stocks starting next week, about 14 months after it imposed it to cope with a stock market rout triggered by the Covid-19 pandemic.

Although retail investors have urged financial authorities to prohibit the practice, some experts said the partial resumption of short selling is unlikely to have a major impact on the market, given excess liquidity and an earnings boost.

However, some stocks may be vulnerable to short selling if they have relatively higher valuations than their earnings, analysts said.

Stock short selling is a trading strategy in which investors sell stocks they borrowed on the belief that share prices will fall in the near future.

When the prices fall, they can buy back the stocks at lower prices, pocket the profit and return the shares to the original owner. Increased short selling typically indicates that many investors anticipate a slump in stock prices.

Heo Jae-hwan, an expert at Eugene Investment & Securities, said, "Given current situations in the financial market, neither foreign investors nor institutional investors could actively short sell."

Higher price-earnings ratios have been supported by an easing of monetary policy and low interest rates, Heo said.

Corporate earnings are also expected to increase this year and next year as the global economy is likely to gradually recover from the pandemic.

"It is difficult to say that short selling would have more advantages than disadvantages," Heo said.

Jun Gyun, an analyst at Samsung Securities, echoed the view, but some stock prices may fluctuate due to short selling if their valuations reach burdensome levels.

Starting next Monday, the ban on 200 large-cap firms listed on the main Kospi and 150 firms listed on the secondary Kosdaq will be lifted.

A total of 917 stocks are listed on the Kospi, and 1,470 stocks are listed on the Kosdaq.

A ban on short selling on the remaining 717 stocks on the Kospi and the remaining 1,320 stocks on the Kosdaq will continue to be in place.

Since early last month, Korea has toughened punishments against naked short selling, a short selling practice without securing underlying assets.

Helped by aggressive purchases of shares by retail investors, Korea's benchmark stock index jumped about 30 percent last year.

Retail investors have criticized short selling for fueling price declines when stock markets fall, but foreign investors are unable to hedge their exposure to the local market under the ban.

Yonhap