SEOUL - South Korean regulators have reinstated a ban on short selling, leading to significant fluctuations in the stock market and igniting debates about market fairness for retail investors. The move has raised questions about its impact on market volatility and the appeal of the country's capital markets to foreign investors.
According to Yonhap News Agency, the ban on short selling, which took effect on Monday, resulted in a substantial 5.66 percent increase in the Kospi index, marking its biggest rise since March 25, 2020. However, the index fell 2.33 percent the following Tuesday due to heavy selling by institutions and foreigners. The ban is set to remain in effect until June.
Financial Supervisory Service (FSS) head Lee Bok-hyun emphasized the necessity of the ban in a meeting with reporters, citing the goal of "restoring a level playing field" for retail investors. The decision to impose the ban was also driven by the regulators' plan to penalize two Hong Kong-based investment banks for engaging in illegal 'naked short selling' – short selling without prior borrowing arrangements.
The ban's reimposition follows the country's previous move to lift restrictions in May 2021, aiming to enhance the global status of the local capital market. However, the current ban has generated various interpretations, with its official purpose being to create an advanced short selling system comparable to those in foreign markets. While short selling is generally permitted globally for its market-stabilizing function, only naked short selling activities are regulated.
The FSS plans to spend about eight months developing a new short selling system to address loopholes, such as the stringent collateral standards and stock resale requirements that disproportionately affect retail investors. Presently, retail investors constitute only 2 percent of the local short selling market, with institutional and foreign investors making up the remaining 98 percent.
The timing of the ban, covering the period of next April's general election, has also sparked political speculation. Some observers suggest that President Yoon Suk Yeol and the ruling People Power Party may be seeking to gain favor with retail investors following a recent electoral defeat.
Critics argue that the eight-month duration of the ban is excessive and advocate for stricter penalties for financial fraud and illegal activities to effectively combat naked short selling. They also point out that South Korea is the only Organization for Economic Cooperation and Development member to implement such a ban on short selling.