Foreign investors produce spike in short-selling

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Local institutional investors' short selling dwindles by 22.7 percentage points

By Anna J. Park

About three months have passed since short selling was partially resumed in early May, ending a 15-month temporary ban in the Korean stock market. It turns out that foreign investors' short-selling transactions have increased significantly, while the presence of local institutional investors has dwindled.

According to the Korea Exchange (KRX), foreign investors have taken up around 77 percent of the entire amount of average daily short-selling transactions during the past three months, which is 21.9 percentage points up from the average figure logged in the first three months of last year, before the temporary ban on short selling was implemented in mid-March due to COVID-19.

The average daily amount of short-selling transactions during the past three months stood at around 562 billion won ($488 million), about 77 percent or 433.1 billion won of which was attributed to foreign investors' participation in the short-selling system.

While the proportion of short-selling transactions by foreign investors has increased from 55.1 to 77 percent, the local institutional investors' proportion dropped to 21 percent, from its previous 43.7 percent, a fall of 22.7 percentage points. Retail investors' proportion increased to 1.8 percent from the previous 1.2 percent.

Given that the daily average of short-selling transactions during the last three months increased by 33 percent, when compared to the first three months of 2020 prior to the short selling ban, foreign investors' participation in Korea's stock market short-selling is salient in both its increased proportion, as well as in the absolute amount of transactions.

Market experts say that there could be two main reasons behind the numbers: the difference in perspectives towards the current market, and the potential cost stemming from increased regulations on short selling.

“I think the main reason behind foreign investors' increased proportion of local short-selling transactions, as opposed to the decreased proportion held by local institutional investors, is their disparate views on the current market. Foreign investors seem to be more focused on the market's overheated atmosphere, whereas local institutions might see the current prices as not that burdensome,” Lim Dong-min, an economist at Kyobo Securities, said by telephone.

He added that strengthened regulations and punishments for illegal acts related to short selling might have also scared away local institutional investors.

“Foreign investors generally enjoy the upper hand in the short-selling market, as they tend to have a more developed capital market system in terms of strategy, cost and infrastructure standards. Local institutional investors have shrunk away from aggressive short selling due to regulatory concerns,” he added.

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In terms of the specific stocks that have been shorted the most on the local stock market, Celltrion topped the list, as over 1.12 trillion won worth of stocks remain with short sellers. The list continues with HMM's 660 billion won worth of shorted stocks remaining, as of July 29, according to the latest statistics available at the KRX website on Tuesday. Stocks of LG Display (463 billion won), Hyundai Motor (291 billion won), Samsung Biologics (221 billion won) and SK Innovation (161 billion won) are heavily shorted on the main benchmark KOSPI market.

On the tech-heavy Kosdaq market, pharmaceutical firm HLB (251 billion won), testing kit business Seegene (210 billion won), 5G tech company KMW (158 billon won), Celltrion Pharm (114 billion won) and secondary battery component company L&F are the top most shorted stocks as of the end of July.

However, some experts point out that the KOSPI index has risen by 1.7 percent during the past three months, after the partial resumption of short selling, to 3,202.32 at the end of last month from 3,147.86 in early May, stressing the belief that the Korean stock market stands strong against short-selling moves.

These experts also say that short-selling transactions account for only 3.9 percent out of all of the transactions on both the KOSPI and the Kosdaq markets, which is a decrease when compared to their 4.6 percent in 2019 and 4.7 percent in 2018. This decrease means that even if the absolute amount of short selling has increased, the total size of the local stock market grew larger than the amount of short selling, which is evidence of the Korean market's resilience.