Value context and insight. lkm@koreatimes.co.kr
ANALYSIS Could GameStop saga happen in Korea?
GameStop logo
By Lee Kyung-min
Retail investors have limited power due to systemic difference in financial market
By Lee Kyung-min
The U.S. GameStop saga is unlikely to materialize in Korea, due largely to a tighter financial market system where small retail investors have limited influence in spiking up share prices through short-selling, according to market watchers, Wednesday.
The much-politicized investment method is widely used by foreign and institutional investors seeking profit after selling borrowed shares at a lower price in a bear market at the expense of retail investors.
Melvin Capital Management, a New York-based hedge fund that bet against the American consumer electronics and gaming merchandise retailer, lost over half its assets after the shares skyrocketed 2,000 percent in January, driven by organized purchases from small retail investors seeking to dry up short-selling funds. The firm's assets dipped to $8 billion as of January, from $12.5 billion in early 2000.
Unfazed by naysayers, the Korea Stockholders Alliance representing some 21,000 stock investors said it would continue “unwavering” efforts to counter short-selling, expecting 10 million retail investors to join their crusade.
Whether the collective move will force larger rivals to buckle under pressure remains to be seen, given the volume of borrowed shares held by investors soared to 5.4 trillion won ($4.8 billion) in January, the highest month-on-month increase since March 2020 when the short-selling ban took effect.
The emergency ban was put in place to curb speculative trading amid a widening fallout from the COVID-19 pandemic. The six-month ban was extended twice and is set to expire on March 15. But the ban is expected to remain for at least three more months as the Financial Services Commission (FSC) seeks to allow retail investors to borrow a greater number of shares from Korea Securities Finance Corp. (KSFC) through brokerages. Until now, short-selling has been used primarily by foreign and institutional investors who were able to borrow shares with ease from the Korea Securities Depository (KSD).
The FSC measure is a strong indication that the ban will remain in place, given repeated pledges from financial authorities that the much-debated investment method will not be allowed to resume unless preceded by retail investor protection measures.
Negligible impact
But analysts were skeptical that retail investors here could stage a repeat of the GameStop saga.
“It is not entirely preposterous, but the impact will be negligible,” Korea Standard Chartered Bank's Korea investment strategist Hong Dong-hee said.
Retail investors can in theory organize a movement to spike share prices, but their orchestrated efforts will not be as effective as what retail investors in the U.S. have been able to pull off.
This is because the number of shares shorted is capped at around 5 percent of the tradable total in Korea, significantly lower than the 140 percent allowed in the U.S.
Buying up shares with an apparent clear limit in Hong's view defeats the purpose of tanking the business of short-sellers ― mostly hedge funds in the U.S. and large international banks and brokerages ― by drying up their funds.
“Retail investors will not cause losses damaging enough for short-sellers to be forced out of the market and give up the practice altogether. The U.S. saga is unlikely to be repeated in Korea,” he said.
Korea Capital Market Research Institute research fellow Hwang Sei-woon echoed the view, saying Korea will not see such a rapid upward spiral driven by a “short squeeze,” an industry term used to explain the saga.
A short squeeze, along with a gamma squeeze, is sustained by a feedback loop of forced purchases, with the latter being driven by the popularity of options, an investment method that is not as popular in Korea.
Korea's call and put options are structured to track the benchmark Korea Composite Stock Price Index (KOSPI), unlike those in the U.S. where individual stock items draw a large number of derivatives trading.
“Gamma squeeze needs strong call and option trades, as illustrated by the GameStop share price fluctuation. Korea, which does not have such vibrant derivatives trading, will see limited price swings. The local group's efforts can cause temporary confusion in the market, but it will not have a domino effect,” he added.
Hong at Standard Chartered agreed, saying individual U.S. investors seeking shorts also bought a large number of call options.
“Someone buying means that there is a party selling. If the counterparty that retail investors expected would buy suddenly sells, then that immediately becomes a loss.”
Sense of injustice
Seoul National University economist Kim So-young said the move by the local stockholders group is explained mostly by retail investors betting big on the stock market over the past few years and their worries about a sudden price fall.
“Stock shorting has become a political issue ahead of the upcoming April by-election, renewing calls to level the playing field that has long been in favor of large investors. Their sense of injustice is becoming all the more stronger since it concerns money.”
The alliance's leader, Jung Eui-jung, said the group is well aware of the limit, but will not give up fighting. “It is about sending a message,” he said.
The U.S hedge funds are managed separately, he said, whereas a few financial services firms in what he calls collusion rake in profit at the expense of retail investors.
The group said shares of Celltrion, an Incheon-based pharmaceutical firm, and HLB, a bio firm, will be shorted in a coordinated show of force. But the shares closed at 355,500 won and 94,800 won, Tuesday, down more than 4 percent and 1.7 percent, respectively.
This followed a respective spike of 14.51 percent and 7.22 percent, a day earlier, on news reports fanning concerns about the Korean version of GameStop taking shape. The two are the most shorted in the main bourse KOSPI and secondary Korean Securities Dealers Automated Quotations (KOSDAQ), respectively.
The stockholders alliance, meanwhile, is not about to turn back.
“No one thought that the KOSPI would exceed the 3,000 level so easily, but we made it happen,” Jung said. “We will come up with well-coordinated action plans in response to government measures in the months to come.”