How will GameStop impact Korean stock markets?

A GameStop store is pictured in the Manhattan borough of New York City, Friday. / REUTERS-Yonhap

Korean stock market’s volatility to increase for time being

By Anna J. Park

The GameStop saga is ongoing as a group of retail investors and short-selling hedge funds are battling over the off-line game retailer's stock prices. The struggling video game retailer's stock price soared by a whopping 1,625 percent in just a month, since the stock was traded at $18.84 on Dec. 31. The price finished at $325 a share on Jan. 29.

Amid the soaring prices, Citron Research founder Andrew Left said in an online announcement late last week ― after covering its short positions against the game retailer's stocks at a 100 percent loss ― that it will discontinue short-selling research and will focus on finding long-term market opportunities, acknowledging that “where we started Citron was supposed to be against the establishment. We've actually become the establishment.”

Yet, despite media hype about imminent bankruptcies of short-selling hedge funds and the historic win of small investors against Goliath hedge funds, statistics by S3 quoted in a recent CNBC report showed that most short-selling positions held by hedge funds are still intact, holding onto their bearish perspective on the stock's future.

A swarm of retail investors gathered on social media ― through Reddit's WallStreetBets and Twitter messages ― expressed their anger over the unlevel playing field as evidenced by Robinhood and other U.S. brokerage firms' unexpected suspension of the stock's trading during the last two trading sessions last week.

While U.S. regulators and politicians announced their plans for investigation and hearings on the matter, whatever will be the final result of the battle ― plunge of the stock price or short sellers' major losses from a possible short squeeze ― one thing for sure is that now could be the start of a watershed moment.

Some market insiders say this heralds a new era of moving towards a more democratized financial system for extensively increased retail investors. Some say this would bring too much volatility in the market, followed by a massive financial crisis; financial regulations would be overhauled soon before things get too risky.

At this uncertain juncture, what would market watchers say about the implications of the ongoing event on the Korean stock market?

There was a massive selloff of Korean stocks in the KOSPI index at Friday's session, net-selling 1.4 trillion won ($1.25 billion) worth of stocks, dragging down the nation's benchmark index.

“At this point, it's very hard to predict how this event will turn out, as no one can be sure about future directions by countless retail investors on a global scale and numerous hedge funds' moves as well,” Lee Hyo-seok, an analyst at SK Securities, told The Korea Times.

“One thing for sure is that the market volatility is bound to increase for the time being; some say this would bring a major financial crisis, but as of now their assertion lacks substantial or concrete evidence at all. Thus at this point, we can only say the market uncertainty is growing,” the analyst said cautiously, adding that foreign money hasn't yet escaped from ETFs following the Korean indexes.

Other stock market researchers say while it's too early to say whether the bubble will soon pop, investors' investment sentiment preferring risky assets will be somewhat wavered. Some market experts say concerns about the increased volatility would bring financial authorities' earlier tapering measures, which could add more volatility in the end.

“There are rumors that hedge funds are selling other stocks to cover losses from short positions, but some also point out that the size is not large enough to bring about massive changes in the overall market,” said Seo Sang-young, strategist at Kiwoom Securities. “What they're more concerned is that the increase of seemingly speculative trading could facilitate earlier adoption of collecting back the liquidity in the market, and this in turn could increase volatility of the market.”

However, some market watchers remain optimistic that the general two pillars of the market ― liquidity and economic recovery ― are still relevant, and the current temporarily high volatility will be stabilized based on businesses' solid performances.