Korea to extend short-selling ban until May 2

Financial Services Commission Chairman Eun Sung-soo, speaks during a press briefing at the Seoul Government Complex in Gwanghwamun, Wednesday. Yonhap

'Outright abolishment not an option given foreign, institutional investors make up 80% of the market'

By Lee Kyung-min

The Financial Services Commission (FSC) said Wednesday that it will extend a ban on short-selling until May 2, 90 days longer than its scheduled expiration date of March 15. The move is seen as a much-rushed measure designed to placate retail investors seeking collective action to vote in non-ruling party figures in the upcoming April mayoral by-election.

Starting May 3, short-selling will be allowed for shares of the top 200 companies on the benchmark KOSPI and those of the top 150 firms on the secondary Kosdaq. They account for a respective 22 percent of 917 KOSPI-listed companies and 10 percent of 1,470 KOSDQ-listed ones. Shares of other less frequently traded companies will be permanently banned for short-selling.

The financial regulator made it clear that an outright abolishment demanded by many retail investors was not an option given Korea's heavy reliance on institutional and foreign investors that make up 50 percent and 30 percent of local bourse transactions, respectively.

The stance against abolishment reflects the international standing of Korea's stock market, the 10th largest in the world by market capitalization following the U.S., China, Japan, European Union, India, United Kingdom, Canada, Saudi Arabia and Germany.

A permanent abolishment of short-selling, the FSC said, would hinder Korea from being recognized as an advanced financial market, since the investment method is one of the key determinants used by Morgan Stanley Capital International (MSCI) global indices and Financial Times Stock Exchange (FTSE) global indices to track a respective 85 percent and 90 percent of global market capitalization. The local stock market retains some 28 billion won in investor funds tracked by the two leading global indices.

“We decided to partially resume short-selling to help allay concerns about market confusion. We will continue to treat naked short-selling as a crime that will be punished accordingly. Market monitoring will be strengthened,” Financial Services Commission Chairman Eun Sung-soo said during a press briefing at the Seoul Government Complex in Gwanghwamun, Wednesday.

Staring April 6, those engaged in naked short-selling will be subject to a prison term of at least one year or a fine of between three and five times the illicit gains made through the illegal practice. This is much harsher than the current fine of around 100 million won ($89,000), widely criticized as a slap on the wrist.

The much-politicized investment method is widely used by foreign and institutional investors seeking to profit after selling borrowed shares at a lower price in a bear market at the expense of retail investors.

The emergency ban was put in place in March of 2020 to curb speculative trading to create a floor on the then-plummeting market amid the widening fallout from the COVID-19 pandemic. The six-month ban has now been extended twice.

Necessary work is underway to allow retail investors to borrow a greater number of shares from Korea Securities Finance Corp. through brokerages, in a measure to grant them wider access to short-selling. This followed criticism that the method was used primarily by foreign and institutional investors who were able to borrow shares with ease from the Korea Securities Depository.