Two global investment banks based in Hong Kong have been hit with the largest-ever fines in South Korea for their alleged involvement in naked short selling, prompting demands from retail investors for more stringent regulations and harsher penalties against such practices.
The Financial Supervisory Service is looking into imposing a record-breaking fine on the two international banks for engaging in what is deemed illegal short selling, and FSS Gov. Lee Bok-hyun has mentioned that criminal punishment is a possibility.
Naked short selling is the practice of selling stocks without first making borrowing arrangements, and the FSS has been investigating two Hong Kong-based units of global investment banks for doing this between 2021 and 2022. Although the banks have not confirmed the reports, the FSS has stated that one of them short sold 101 listed stocks, including Kakao, worth 40 billion won, while the other was involved in illegal short selling worth 16 billion won, involving Hotel Shilla shares.
The FSS has pointed out that the investment banks were aware that they would not be able to borrow the shares they sold, indicating that they were intentionally breaking the rules. This crackdown is expected to help restore some confidence in the Korean financial market, which has been calling for stricter enforcement of the law against such illegal activities.
However, the FSS’ action has come late, as the number of illegal short selling cases has increased from four in 2020 to 16 in 2021 and 32 in 2022. This is likely due to the nominal fines imposed on those who violate the regulations, which are usually too small compared to the profits they make.
What’s more, foreign firms appear to be more likely to engage in naked short selling, suggesting that there might be persistent problems with related rules and oversight. According to Financial Services Commission data, 92 percent of the fines imposed on 45 cases of illegal short selling in the first eight months of the year were given to foreign firms.
The impact of short selling on the stock market is also an issue of contention, with retail investors believing it adds to price volatility while the FSS investigation team saying that the volume of stocks involved is small.
In light of this, financial authorities and legislators should work together to introduce stronger restrictions against illegal acts that could undermine public trust in the market.