Small investors add to dispute over politically motivated ban on short selling

Small investor advocates hold a rally against short selling at Gwanghwamun Square in Seoul, Nov. 9. Yonhap

Small investors are asking the government to tighten the latest ban on short selling, as the ban was regarded as a politically motivated decision ahead of the April 2024 general elections and the retail investors, as voters, appear to be making excessive demands thereafter.

According to financial sources, Thursday, a group of small investors demanded the financial regulator make no exceptions and include domestic brokerage houses in the short selling ban effective through mid-2024.

Under the current market regulations, securities firms here are free from the ban while institutional investors and foreigners are not allowed to engage in short selling.

The ban was adopted as small investors strongly protested that short selling, mainly led by foreign entities, led to a sluggish stock market.

A globally used risk-hedging strategy, short selling is regarded as having a positive role in providing liquidity to markets and preventing price bubbles.

But at the same time, it can also amplify market volatility and be exploited as a means of price manipulation.

This is because traders borrow shares and make profits when prices fall, as they buy back the shares at a lower price and pocket the difference.

But even after the ban went into effect, Nov. 6, the benchmark KOSPI did not advance much.

The KOSPI back then closed at 2,502.37 points, up 5.66 percent or 134.03 points from the previous session, as the shorts selling traders went on a buying spree of the relevant shares.

The 134.03-point rise was the biggest on record for the main bourse, while the 5.66 percent gain was the steepest since March 25, 2020.

The KOSPI then went up and down, staying in a range between 2,400 and lower 2,500 level.

The lower-than-expected improvement of the market is partly attributable to the fact that not all short sellers are immediately buying back their borrowed shares as there is no deadline to wrap short selling during the period of the ban.

“It seems small investors think expanding the ban and including the domestic securities firms may boost the market to some extent,” a source said.

Critics, however, say it will not be the case, noting less than 10 brokerage houses are engaged in short selling and others gave up such trading to avoid blame for stock price falls.

“Smaller investors are apparently capitalizing on their voting power to influence the stock market,” a critic said. “The demand should not be accepted as it can ultimately have a negative influence on the market.”

Chances are slim that the financial regulator will accept the demand of retail investors, the sources said, noting that the United States and the European Union leave brokerage houses as an exception to the short-selling ban.