Hong Kong investment banks illegally short-sold Korean stocks

Financial Supervisory Service office in Yeouido, western Seoul [YONHAP]

Two global investment banks based in Hong Kong illegally short-sold stocks worth 56 billion won ($41 million) in Korea, according to the Financial Supervisory Service (FSS) on Thursday.

The FSS found the global investment banks committed naked short selling, the practice of short selling a tradable asset without first borrowing the asset, and pledged to expand the investigation into other global investment banks to find if similar transactions were committed.

One of the investment banks short-sold some 40 billion won against 101 stocks from September 2021 through May 2022. It made the transaction through domestic brokerage firms, which the FSS also blamed for not taking preventive measures.

The other investment bank short-sold roughly 16 billion won against nine stocks from August 2021 through the end of the year. It admitted to the illegal short selling and improved its corporate system upon the FSS's request, while the FSS is still waiting on the other investment bank.

The FSS did not disclose the short-sold stocks.

“The latest issue is serious considering that global investment banks short sold against many types of stocks for a long period despite [having known] the issues that arose relating to short selling,” said Kim Jung-tae, deputy governor of disclosure and investigation at the FSS in a press conference held at its office in Yeouido, western Seoul.

The offending banks are expected to receive “the heaviest penalty” following a review by the Securities and Futures Commission, a sub-commission within the Financial Services Commission (FSC) responsible for overseeing the securities and futures markets, said the FSS.

The largest ever penalty imposed by the FSC for illegal short selling was 3.87 billion won imposed on an undisclosed financial company in March.

“The FSS plans to cooperate with the Securities and Futures Commission of Hong Kong, if necessary, to investigate the case together. We will continuously expand the investigation into global investment banks,” Kim added.

Short selling, which is not in and of itself illegal, plays an essential role in the efficiency of capital markets by facilitating secondary trading of securities, improving liquidity and eliminating bubbles.

The practice has often been blamed by retail investors for falls in stock prices, especially during volatility, and has been viewed negatively in Korea.

Short selling was temporarily prohibited in Korea in March 2020 when the market melted down following the outbreak of the Covid-19 pandemic. The short selling of Kospi 200 and Kosdaq 150 index stocks was allowed again in May 2021.

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