Financial regulators have recently implemented a ban on short selling, which resulted in a surge in stock prices and was seen as a positive development among investors. The Kospi rose by 5.66 percent on Monday, the biggest increase since March 25th, 2020, however it dropped 2.33 percent the day after due to institutional and foreign selling. This restriction is scheduled to last until June.
The question is whether this ban will help reduce market volatility related to short selling or, as some have argued, damage the appeal of the country’s capital markets to foreign investors. Lee Bok-hyun, head of the Financial Supervisory Service, has emphasized the need for this temporary ban, claiming it is necessary in order to introduce an advanced short selling system and “restore a level playing field” for retail investors.
It was discovered that around 100 listed stocks have been subject to illegal short selling, or “naked short selling” – the practice of short selling without first making borrowing arrangements. This has caused concern as retail investors are put at a disadvantage compared to institutional investors when it comes to short selling, due to the gap in access to market information and the unfair application of related regulations.
The ban was also prompted by plans to impose fines on two Hong Kong-based investment banks after their naked short selling activities were revealed. The Financial Supervisory Service has stated that the reason for the ban is to create an advanced short selling system, similar to those in other foreign markets, and to even the playing field for investors.
Critics have argued that the eight-month ban is excessive, and called for stricter punishments for financial fraud and illegal activities as a fundamental solution to prevent naked short selling. There are also those who have suggested that the timing of the ban is politically motivated, as it will last until the general election in April 2021. However, the issue of the short selling ban cannot be resolved with political considerations.