Value context and insight. lkm@koreatimes.co.kr
Measures to protect retail investors from short-selling face daunting challenges
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By Lee Kyung-min
By Lee Kyung-min
Retail investors are unlikely to level the playing field when it comes to short-selling, despite a growing move by the ruling bloc to increase transparency in the stock market.
This is because naked short-selling ― a deeper problem ― cannot be detected in real time under the current operating system and is highly likely to remain so in the future.
Short-selling is a much-politicized financial investment method widely used by foreign and institutional investors to profit after selling borrowed shares at a lowered price in a bear market.
Naked short-selling involves selling shares without borrowing or ensuring that they can be borrowed later and is illegal.
Rep. Park Yong-jin of the ruling Democratic Party of Korea (DPK) is seeking to propose a bill to mandate the electronic processing of short-selling, a move aimed at changing the current practice where borrowing requests are processed by telephone, online messenger services or by hand at brokerages.
The National Assembly National Policy Committee member said the longstanding practice is highly problematic, fanning distrust over stock market transparency.
“Brokerages should handle short selling-related transactions using the electronic system, which is a necessary step to strengthen the overall operating system and allay distrust in the market,” he said.
Yet the move will stop far short of preventing naked short-selling, since identifying shares traded in real time relative to net shares held in the account balance is practically impossible.
This is evidenced by the Financial Services Commission (FSC) retracting an ambitious plan to create such a system.
“Setting up a system to identify naked short-selling in real time is highly difficult. It has been so far and this is not likely to change in the future,” said Hwang Sei-woon, a researcher at the Korea Capital Market Institute.
Apart from the technical difficulties, such an endeavor is hindered by the immense cost of sharing investors' information as cooperation between relevant organizations is at an impasse.
“Concerns over data privacy and protection will become a major hurdle, not to mention the sheer monetary cost needed for inter-organizational system integration online,” he added.
Many retail investors here are demanding the extension of a ban on short-selling, an emergency measure put in place in March 2020 to curb speculative trading amid the widening fallout from the COVID-19 pandemic.
The collective move reflects fears of a sudden nosedive in the price of shares retail investors have bought over the past year, notably Samsung Electronics among other large-cap shares.
The benchmark Korea Composite Stock Price Index (KOSPI) exceeded 3,000 points for the first time, Jan. 6, powered by continued buying by retail investors, with many of them borrowing money to buy stocks amid record-low interest rates brought on by pandemic-sparked monetary easing.