Short-Selling Suspended in South Korea Till June 2024

Earlier this month, it was reported by the Financial Services Commission on Sunday, November 5, that South Korea will issue a stop to stock short-selling starting from Monday, November 6, until June 2024 to allow regulators to “actively” enhance the rules and systems.

The commission stated that trading with borrowed shares will be prohibited for equities on the Kospi 200 Index and Kosdaq 150 Index until June 20.

Short-selling of stocks was allowed in South Korea in May 2021, while a pandemic-era ban was in place for more than 2,000 equities. However, according to Smartkarma Holdings analyst Brian Freitas, reimposing the complete ban on the widely used trading practice could hinder the nation’s efforts to seek an upgrade in a critical global index.

He said,

• The short-sell ban will further jeopardize Korea’s chances of moving from an emerging market to a developed market.

• Expect bubbles to form in market pockets favoured by retail investors as short selling no longer acts as a brake on absurd valuations.

According to Bloomberg, the financial regulator said there was a need to respond to growing market uncertainties preemptively, and there were concerns that routine naked short-selling could undermine the formation of fair prices. It said authorities had found circumstances for possible naked short-selling after discovering cases of the practice by global banks. 

The exchange data reports that in South Korea, short-selling accounts for a small portion of the country’s US$1.7 trillion stock market, about 0.6% of the Kospi market value and 1.6% of Kosdaq.

The announcement by the Financial Services Commission on Sunday, November 5, comes ahead of general legislative elections to select National Assembly members in April. Some ruling party lawmakers in the assembly instructed the governments to suspend stock short-selling to address the protest staged by retail investors over the practice.

REASON: The investors say short-selling leads to unfair advantages for foreign and institutional investors. 

It’s also reported that Yoon Suk-yeol, South Korean President, and his party are campaigning for urgent reforms in some sectors as they move closer to the upcoming general election, including changes in the pension system and the prevention of market monopolies.