Back into the familiar world: A cautionary tale of short selling

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Back into the familiar world: A cautionary tale of short selling

Published: 01 Apr. 2025, 00:02

Audio report: written by reporters, read by AI

Suh Kyoung-ho

The author is an editorial writer at the JoongAng Ilbo.

“Market corrections are healthy and normal.”

That was the message from U.S. Treasury Secretary Scott Bessent in mid-March. The U.S. stock market has had a rough ride this year. The S&P 500 index has dropped 8 percent from its record high last month and is down 5 percent year to date. The downturn is largely driven by the Donald Trump administration’s trade war and retaliatory tariffs. Yet Bessent, true to his hedge fund background, appeared unfazed by the decline — responding, in the words of some foreign media, with a sense of “detached calm.” For him, market drops are just part of the natural order.

In Korea, stocks plunged 3 percent on Monday — the first day that short selling resumed after a 17-month hiatus. Some individual investors, long hostile to short selling, lashed out with warnings not to “underestimate K-style short selling.” But a balanced perspective is essential. While the return of short selling played a role, the bigger factor was rising global uncertainty ahead of the Trump administration’s announcement of reciprocal tariffs. The U.S. stock market fell around 2 percent late last week, and Japan’s Nikkei crashed 4 percent on Monday.

A screen in Hana Bank's trading room in central Seoul shows the Kospi closing at 2,481.12 points on March 31, down 76.86 points, or 3 percent, from the previous trading session. [YONHAP]

It has been five years since Korea last allowed short selling on all listed stocks — a measure halted during the onset of the Covid-19 pandemic in 2020. Ahead of the resumption, the government overhauled key systems to better protect retail investors. A real-time system was introduced to monitor available short-able shares, and securities firms now face stronger obligations to verify short-selling orders. Korea’s short-selling regulations, already among the world’s strictest, have grown even tighter. Given these improvements, further outcry or political backlash should have no place going forward. Instead, we need to reflect on why the blanket ban was problematic — an exercise in jingbi, or learning from past mistakes to avoid repeating them.

First, policy on short selling was overly swayed by political considerations. Korea has imposed four short selling bans in its history: during the 2008 global financial crisis, the 2011 eurozone debt crisis and the 2020 Covid-19 shock — each during legitimate periods of financial instability. But the most recent ban in November 2023 — reversing a partial reopening in May 2021 for Kospi 200 and Kosdaq 150 stocks — came at a time of no financial crisis or pandemic. The move was widely criticized as an election-year ploy.

Second, Korea stood alone in defying global standards. While some countries briefly paused short selling during the pandemic, none imposed a ban as long or sweeping as Korea’s. The move undermined foreign investor confidence. In fact, short selling serves a critical function in markets: It deflates bubbles, helps prices reflect fair value, and counters price manipulation. Institutional and foreign investors often use strategies that combine long positions with short selling. A market without short selling isn’t taken seriously. Korea’s persistent failure to gain entry into the MSCI Developed Markets Index is partly due to this restriction. Legendary investor Jim Rogers once called Korea’s short-selling ban “a foolish move.”

Third, economic policymakers were sidelined in the decision-making process. The Financial Services Commission, which had resisted the ban until the end, was effectively rendered powerless. No sound policy can emerge from such a system. President Yoon Suk Yeol, who had championed a Cabinet-driven approach to governance during his campaign, ended up offering a textbook case of poor personnel management. Undermining ministries and their technocrats leaves behind a bureaucracy that is passive and soulless. The unpredictability of Korean government policy has long been a drag on the market—one of the key drivers of the so-called Korea Discount.

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

Stock prices are not something the government can artificially lift — they rise as a consequence of good policy. When the government resists populist temptations and focuses on cultivating healthy corporate growth, the stock market will eventually reflect that. Equally important is resolving the political instability that has persisted since the declaration of martial law. The Constitutional Court’s pending decision on the impeachment of the president must help restore calm, and society must move forward wisely. After all, the thing markets hate most is uncertainty.

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