President says short selling ban will last indefinitely

President Yoon Suk Yeol presides over a weekly Cabinet meeting at the presidential office in Seoul's Yongsan District, Tuesday. Yonhap

President Yoon Suk Yeol said on Tuesday that the ban on short selling will continue indefinitely after it was reinstated for the first time in three years, until the government comes up with fundamental measures to root out illegal market practices.

The president’s remark hints that the ban can be extended, after the Financial Services Commission (FSC) announced last week that short selling will be fully suspended until the middle of next year.

“Leaving illegal short selling undone will hinder stocks from being priced in a fair and objective manner,” Yoon said during a weekly Cabinet meeting at the presidential office in Seoul’s Yongsan District.

He was referring to naked short selling, a banned practice of selling stocks without actually borrowing or owning those shares, allegedly done by global investment banks.

Such practice is in contrast to the legitimate method of short selling, in which a trader borrows shares and buys them back at a lower price to pocket the difference.

“Illegal short selling will inflict massive losses on retail investors while dampening credibility on the stock market and prompting investors to leave,” the president said. “The government thus will ban short selling to ensure there is no further loss suffered by retail investors.”

He accordingly asked the FSC and the Financial Supervisory Service (FSS) to “level the playing field to protect retail investors, by taking fundamental measure to improve the situation.”

Because short selling is widely practiced by foreign investors, the ban prompted concerns that Korea’s stock market will be regarded as less open and transparent for international investment.

It also prompted concerns that the ban will furthermore toughen Korea’s bid to gain developed market status from global index provider Morgan Stanley Capital International (MSCI).

Under the circumstances, Yoon said the suspension on short selling will rather “positively influence competitiveness of the country’s stock market in the long term."

He pointed out Korea has a high concentration of retail investors and tends to be more volatile compared to the U.S.

Meanwhile, the ban on short selling, according to the industry sources, is not particularly leading to a bullish market as expected in favor of retail investors.

The sources said it is partly because foreign investors were short covering or buying back the borrowed shares in order to return them to the lenders in high volumes on Nov. 6, the first day of the ban, but not since then.

On Nov. 6, Korean stocks went up 5.66 percent — the highest in almost four years — as foreign investors net-purchased 711.1 billion won ($548.6 million) worth of shares on the benchmark KOSPI.

The sources speculate that the short covering appears to have ended, given that the current Korea’s stock regulations do not define by when short covering should be completed after short selling takes place.