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Short selling to fully resume on Korea’s stock market after 17-month suspension

Published: 31 Mar. 2025, 09:40 Updated: 31 Mar. 2025, 17:32

At the short selling computer system construction demonstration held at the Korea Exchange in Yeouido, western Seoul, on March 19, NSDS Supervision Team members and KB Securities officials demonstrate illegal short selling detection using simulated data. [YONHAP]

Short selling will fully resume in Korea’s stock market on Monday, ending a 17-month suspension that began on Nov. 5, 2023, to curb naked short selling. This marks the first time in five years that short selling will be allowed across all listed stocks.

Ahead of the restart, market watchers are warning of potential volatility, as data suggests that short selling activity is poised to rebound. According to the Korea Financial Investment Association on Sunday, the number of shares borrowed through stock lending — an indicator of short selling readiness — has surpassed 2 billion, reaching levels last seen before the ban.

On March 28, the final trading day before the restart, 291 million shares were borrowed through stock lending, while only 19 million were returned. As a result, the outstanding balance surged by nearly 300 million shares in a single day.

Stock lending, where investors borrow shares for a fee, is considered a leading indicator of short selling. Since the first step in a short sale is borrowing shares, an increase in stock lending is often interpreted as a buildup of short selling positions. From the start of the ban in November 2023 through March 27, the daily average number of shares lent stood at just 17.7 million. The spike to over 290 million shares suggests that short sellers are now preparing in earnest.

As of March 28, the total balance of borrowed shares stood at 2.04 billion, valued at 66.64 trillion won ($49.5 billion). This is the first time since the ban was introduced that the figure has surpassed 2 billion shares.

Analysts expect that sectors which have recently seen sharp gains — such as defense, secondary batteries and biotech — may be most affected by renewed short selling. These sectors have also seen the largest increases in stock lending balances.

From March 24 to 28, LG Energy Solution recorded the largest increase in borrowed shares among Kospi-listed companies, with its balance rising by 440.7 billion won. Hanwha Aerospace followed with 363.6 billion won, while Kakao saw an increase of 127.1 billion won. On the Kosdaq, EcoPro’s stock lending balance rose by 233.1 billion won, followed by HLB at 185 billion won and Alteogen at 151.8 billion won.

“During the first month after the resumption, industries like shipbuilding and machinery, which saw sharp price gains, may come under pressure,” said Byun Jun-ho, an analyst at IBK Investment & Securities. “Stocks with high volatility or recent rallies could face heavy selling and may decline quickly. Short-term investors should be cautious.”

Some experts view the policy shift as positive in the long term. Lee Sung-hoon, an analyst at Kiwoom Securities, said, “In past cases, short selling led to increased volatility in some sectors for about a month, but did not affect the overall market trend. Over time, we may even see improved foreign investor inflows.”

Speaking to Bloomberg on Saturday, Liao Yi-ping, a portfolio manager at Franklin Templeton, said volatility may rise in the short term, but added that if listed companies improve shareholder returns, it could help close the so-called “Korea discount,” referring to the undervaluation of Korean stocks.

To mitigate potential risks, the Financial Services Commission said it will temporarily expand the designation of “short-selling overheated stocks” through the end of May. Stocks showing a sudden spike in short selling activity will be restricted from further short selling the following day.

The Financial Supervisory Service and the Korea Exchange will also activate the new Naked Short Selling Detection System (NSDS) starting Monday. The system will continuously monitor short selling by institutional investors and automatically flag illegal transactions.

Translated from the JoongAng Ilbo using generative AI and edited by Korea JoongAng Daily staff.

BY JEONG JIN-HO [[email protected]]