Illegal short selling in Korea targeted by the FSC

Kim Joo-hyun, chairman of the Financial Services Commission, speaks at a meeting held to root out illegal short selling in western Seoul on Thursday. [YONHAP]

Korea's financial regulators vowed to take a firmer stance against illegal short selling and seek to revise laws if necessary.

The measures were announced as some retail investors called for a ban on short selling amid a fall in stock prices and as several securities firms were fined for violating related rules.

Short selling is a trading technique in which investors sell stocks they borrowed in expectations that share prices will fall. When the prices decline, they can make profits by buying back the stocks at lower prices.

In and of itself, the practice is not illegal, but if not done properly, it can violate securities laws. The regulator did not say exactly how short sellers have been violating laws recently.

Kim Joo-hyun, chairman of the Financial Services Commission (FSC), held a meeting to discuss ways to root out illegal short selling with prosecutors, other regulators and the stock exchange.

"It is necessary to root out illegal activities involving short selling in a bid to regain trust in the capital market," Kim said at the meeting. He added related laws may be revised as early as this year, like requiring "long-term short sellers trading large quantity to make reports."

Korea prohibited short selling for all shares in March 2020 following the market crash caused by the Covid-19 pandemic. It was partially resumed last year for large and mid-cap companies in the Kospi 200 and Kosdaq 150 indexes.

Korea has been under pressure to fully resume short selling in order to be included in the MSCI Developed Market Index, a challenging jump that would bring investor recognition.

Short selling, a globally used risk-hedging strategy, plays a positive role in providing liquidity to markets and preventing price bubble creation, proponents argue. But it can also amplify market volatility and be exploited as a means of price manipulation, critics say.

Many retail investors in Korea claim the trading technique has caused stock prices to fall. Korea's benchmark stock index has dropped about 20 percent so far this year.

They also argue that short selling, which can be expensive and complicated, favors large institutions.

The regulator imposed fines on several brokerage houses for violating short selling rules this year.

Korea Investment & Securities was fined 1 billion won ($766,810) in February as it did not disclose the short sale of some 150 million shares, including shares in Samsung Electronics, over the past three years.

BY JIN MIN-JI, YONHAP [jin.minji@joongang.co.kr]