Illegal short-selling strike team assembled by FSS as stocks fall

Financial Supervisory Service Governor Lee Bok-hyun speaks at a press conference held in western Seoul on Aug. 11. [NEWS1]

Morgan Stanley is being investigated for illegal short selling by the Financial Supervisory Service (FSS), according to local press reports.

The reports come as markets in Korea and elsewhere are in turmoil and the government has threatened to go after speculators taking advantage of the situation.

The FSS "will establish a team dedicated to inspecting short selling to swiftly inspect illegal short selling and to strictly punish illegal activities," FSS Governor Lee Bok-hyun said on Monday.

"It is necessary to inspect institutions or brokerages where short selling transactions have been concentrated during times of market declines," Lee told reporters last week. He noted that it was strange that so much of the short selling is concentrated at a single brokerage.

Morgan Stanley processes the largest number of short selling orders in Korea, according to local media reports.

The investigation of the brokerage was reported by Yonhap. The FSS would not confirm the report.

With short selling, traders sell stocks they borrowed on expectations that share prices will decline. When the prices fall, they profit by buying back the shares at a lower price.

The practice is not itself illegal unless the rules are violated, such as the selling of stock that is not already owned. How Morgan Stanley may have violated the rules has not been reported, and the FSS has not clarified what illegal activities it is targeting with the new short-selling team.

Short selling is often blamed for the fall in stock prices during times of volatility. The practice was prohibited in Korea from March 2020 to May 2021, when it was again allowed for the country's largest stocks.

The prohibition on short selling stocks outside of the Kospi 200 index and the Kosdaq 150 index remains.

Korea is incentivized to allow short selling because international investors often need to sell short to hedge risk and may avoid markets where it is not allowed, while MSCI will only categorize a market as developed if short selling is allowed.

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