Short-selling system still leaves retail investors at a disadvantage

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By Anna J. Park

Following the resumption of short-selling on local stock markets in May, the trading system is once again being largely dominated by foreign investors.

Kim Han-jung, a two-term lawmaker of the ruling Democratic Party of Korea, stated that the system still presented an uneven playing field, calling for the financial authorities to curtail the current unlimited borrowing periods for foreign investors to 60 days, the same as that for retail investors.

He also asked them to come up with fundamental measures to improve the system for the sake of a sounder and healthier development of the local stock markets.

According to the latest figures by the Financial Services Commission (FSC), retail investors only accounted for about 1.9 percent of short-selling transactions, while foreign investors accounted for 76 percent of them.

Since the resumption of the system in May, after a yearlong temporary ban due to the shock from the COVID-19 pandemic, foreigner investors have disposed of 46.5 trillion won ($39 billion) worth of local stocks through short-selling. This represents more than 10 percent of the entire net-selling in this category by traders over the past five months.

Kakao was the most shorted stock, followed by Samsung Electronics, Hyundai Merchant Marine, SK hynix and LG Chem.

“Short-selling is supposed to provide liquidity to a market and prevent it from overheating. Yet most short-selling transactions are focused on a few stocks that have been net-purchased by retail investors,” Kim said. “In the end, the system serves the interest of foreign investors at the expense of retail investors.”

The FSC recently announced plans to extend retail investors' borrowing period from the current 60 days to 90 days, in order to widen access to the system for retail investors.

However Kim criticized this move, saying, “Instead of extending retail investors' borrowing period, it's more desirable to reduce that for foreign investors to 60 days, the same as retail investors.”

The main opposition People Power Party's Hong Joon-pyo, a five-term lawmaker, also criticized the short-selling system, saying it triggered plunges in stock markets.

“Short-selling, mostly used by institutional investors, is a wrong trading system that is innately disadvantageous to retail investors,” he wrote on social media.