Short-selling decreasing steeply after disclosure rule

By Yoon Ja-young

The ratio of short-selling in stock trading is falling steeply after the adoption of a regulation which requires the disclosure of information on short-sellers.

According to the Korea Exchange (KRX) which operates the country’s bourses, short-selling took 2.7 percent of all stock transactions Thursday when the regulation was first implemented, more than a 4 percentage point drop from May 13, when short-selling stood at the year’s record-high of 6.84 percent.

Short-selling refers to an investment scheme where investors sell stocks they don't own. They borrow them and can repurchase the same stocks later to return them to the lender. They can make an investment return in a bear market, as they will be repurchasing shares at prices lower than the prices at which they sold the stocks. Around 70 to 80 percent of short-sellers are foreign investors while institutional investors make up the rest.

Securities companies play a role of broker in short-selling ― they lend institutional investors shares that they borrow from small investors or pension funds. The small investors are offered between 0.1 and 5 percent annual interest rates for lending their shares while the brokerages can get commissions.

While short-selling makes the stock market more effective by attracting those who look at stocks pessimistically, short sellers pull down indices further. Some small investors in the country thus have been demanding that short-selling should be banned. Small shareholders of Celltrion, a biopharmaceutical company listed on the tech-loaded Kosdaq market, for instance, recently held a campaign among themselves to move their stocks to securities companies that don’t lend shares, threatening brokerages that they should stop helping short-sellers. The small shareholders of Celltrion have been claiming that the stock isn’t rising as much as it should due to short-sellers.

Short-selling has taken between 3 and 7 percent of the total daily stock being traded this year, but the percentage decreased steeply following the introduction of the disclosure regulation on short-selling. It requires investors to report to the Financial Supervisory Service when they short-sell over 0.5 percent of any company’s total outstanding shares. They also should report to the regulator if the sum of short-selling exceeds 1 billion won even if it is less than 0.5 percent of the total outstanding shares. They have to report the transaction within three days of trading. The regulator then hands it over to the KRX for disclosure. The identity of short-sellers by name, birth date, business registration number and nationality will be disclosed.

Analysts expect the regulation will come as a burden for short-sellers.

“It will be burdensome if the stock has a high ratio of short-selling. In case of stocks with a small market cap, one is obliged to make disclosure for a relatively small sum of short-selling. Hedge funds are thus likely to focus on large shares,” said Kim Ye-eun, a market analyst at LIG Investment and Securities.

The new regulation has been drawing mixed reactions on the market, with some saying that it is asking too much to disclose personal information. Others also point out that short-selling plays a positive role in the market as well. “Researches show that short-selling triggers declines in shares prices, but their general consensus is that it doesn’t always trigger excessive declines,” said Hwang Sei-woon, head of the capital markets division at the Korea Capital Market Institute.

“Short-selling works as an important path to reflect negative information on stock prices. It plays the role of maintaining price effectiveness in the market,” he added.