'Short-selling gains 39 times greater than retail leveraged trading'

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By Lee Kyung-min

The returns on short-selling were 39 times greater than retail, leveraged trading over the past three years, highlighting the expanded gap in stock gains between individual, retail investors and their large counterparts ― foreign and institutional investors, a study showed Monday.

Short-selling refers to the sale of borrowed shares with the expectation of profiting from a price fall when the shares are bought back at a lower price. It's been widely used by foreign and institutional investors seeking leverage to net greater gains.

This has intensified the call for the extension of a ban on the trading method, long criticized as an easy way for big players to make money at the expense of individual retail investors who are subject to stricter rules involving lending periods for and interest on borrowed shares.

The temporary ban is set to expire March 15, about a year after it was put in place as an emergency measure to create a floor for the then-plummeting stock market at the very beginning of the COVID-19 pandemic.

The study conducted by a team of researchers at Hanyang University from June 30, 2016 to June 28, 2019, showed the number of shares leveraged by retail investors, largely referred to as credit trading, accounted for 8.69 percent of all market transactions, about six times higher than short-selling transactions (1.46 percent). Credit trading involves shares bought with funds borrowed from brokerages.

The amount traded for the former was 547.9 trillion won ($494.8 billion), twice the 309.8 trillion won traded in short-selling. They accounted for a respective 7.93 percent and 4.48 percent of the total.

However, the return on short-selling was over 917.7 billion won, 39 times the 23.3 billion won gained by retail investors.

“The gains were determined chiefly by the mode of investment granted to each investor,” the report said. “Institutional and foreign investors have a variety of advantages ranging from costs, choice of stocks and information power.”

Also confirmed by the researchers was that shares traded more in short-selling gave higher returns compared to others traded in regular sessions. The greater the number of stocks shorted, the sharper the price fall was, it added.

Leveraged shares bought by individual investors with funds borrowed from brokerages showed a steep fall in returns, meaning many of them experienced losses.

Over 110,000 signatories signed on to an online petition on the Cheong Wa Dae website calling for a permanent ban on short-selling, Monday, a growing public move seeking to level the playing field that individual, retail investors consider heavily distorted in favor of their large counterparts.

The move continues to gain steam after Prime Minister Chung Sye-kyun expressed his opposition to the financial investment method. Concerns are mounting that the politically sensitive issue could become yet another failed attempt to overhaul the financial market, following a similar move by the finance ministry.

The ministry lowered the minimum combined value of shares held by individual retail investors subject to capital gains tax of between 22 percent and 33 percent to 300 million won from 1 billion, last October, due a fierce backlash from investors.