Regulator slammed for loophole in short selling ban
Financial Services Commission (FSC) Chairman Eun Sung-soo announces the FSC's decision to impose a six-month ban on stock short selling at the Government Complex Seoul, Friday. / Yonhap
By Park Jae-hyuk
The nation's financial regulator has enraged retail investors here after allowing “market makers” to conduct short selling as an exception, despite a six-month ban on the investment method which went into effect Monday.
Market makers, or “liquidity providers,” are individual market participants who make purchases and sales in order to keep financial markets liquid.
In Korea, 12 securities firms have been designated by the Korea Exchange as market makers, including three local subsidiaries of global investment banks ― Goldman Sachs, Societe Generale and CLSA.
They are still able to sell borrowed shares in the hope of making a profit from a price fall by buying the shares back at a lower price.
As a result, stocks worth 468.6 billion won ($377 million) were collectively sold short on the benchmark KOSPI and the tech-heavy Kosdaq markets, Monday, the first trading day after the imposition of the “temporary short selling ban.”
The Financial Services Commission (FSC) said the market makers have prevented stock market plunge.
They were also able to continue short selling when the FSC prohibited the investment method temporarily during the global financial crisis in 2008 and the European debt crisis in 2011.
Amid the intensifying market volatility following the coronavirus outbreak, retail investors have regarded this as a preferential treatment for institutional investors.
When the stock market tumbles, foreign and institutional investors with access to short selling have made profits, while retail investors have lost money.
The Korea Stockholders Alliance comprised of 3,000 retail investors said Monday they would file an injunction against the FSC, asking a court to completely prohibit short selling by institutional investors.
“We are also considering filing damage claims against the FSC and its chairman as they caused huge losses to Korean investors by their dereliction of duty,” said organization founder Jung Eui-jung.
He said market makers have capitalized on their status to manipulate the market and confuse investor sentiment.
The Citizens' Coalition for Economic Justice also cast doubt on the effectiveness of the FSC measure.
“The FSC should apologize for its belated response and impose a complete ban on short selling without an exception,” the progressive civic group said in a statement.
Additional stabilization measures
Against this backdrop, the FSC unveiled additional measures to stabilize the market, after holding an emergency meeting Tuesday.
The FSC said its Chairman Eun Sung-soo urged government officials to be prepared to carry out the measures without delay, when they are needed.
According to the FSC's contingency plan, bond market stabilization and financial stabilization funds, and primary collateralized bond obligations (P-CBO) will be used to stabilize the market.
The FSC also said it will convene a meeting every day before the stock market opening, if the volatility continues as a result of the spread of COVID-19.