Short-selling ban should be shortened

On the first day of a short-selling ban, the KOSPI and KOSDAQ indices witnessed an unprecedented surge, only to take a nosedive by 2 percent the next day. The share prices of rechargeable battery companies also experienced consecutive drops or barely managed to hold their positions. These adverse trends were largely driven by the net sales of foreign investors closing short positions, leading many analysts to conclude that the short sale ban’s impact was transitory and, instead, exacerbated market volatility.

The government’s decision to impose a complete short-sale ban, even in the absence of an economic crisis, has stirred concerns about potential stock price manipulation and the formation of bubbles, along with the outflow of foreign investments. The ban’s rationale was to curb overheated stock prices and prevent stock price manipulation by market players. However, this move has faced criticism from foreign investors and global media outlets, with some labeling it as “silly” and detrimental to investor confidence.

The controversy surrounding the short sale ban in Korea is rooted in the perceived “unlevel playing field” in the country’s stock market. A staggering 98 percent of short sales are carried out by foreign and institutional investors, leaving only 2 percent for retail investors. Retail investors have been subjected to discriminatory standards regarding loan-to-value ratios and repayment periods, which determine the forced liquidation of stocks. This has fueled criticism that retail investors bear the brunt of losses caused by short-selling sprees led by foreign and institutional investors.

On Monday, Lee Bok-hyeon, the chairman of the Financial Supervisory Service, highlighted that approximately 100 stocks on the KOSPI and KOSDAQ were involved in naked short selling, an illegal practice in Korea. He vehemently rejected claims that the short sale ban was merely a populist technique aimed at the next year’s general elections.

The regulatory authorities, along with the Supreme Prosecutors’ Office, had previously announced plans to reform the short-selling system to be more favorable for individual investors and to intensify checks and penalties for illegal short-selling, slated for implementation in July 2022. However, the authorities have been criticized for taking more than a year to act on these promises and only recently implementing a complete ban. This delay has raised suspicions that the crackdown announcement was merely a token gesture, and that the authorities were complacent in overhauling a short sale system where orders are still placed by handwritten means.

The longer the short-selling ban remains in effect, the more it threatens the external creditworthiness of Korea’s stock market and accelerates the outflow of foreign investments. With the interest rate gap between Korea and the U.S. at an all-time high, concerns about capital outflow and exchange rate increases loom large. The government should take immediate action to rectify the disparities in the market and minimize the duration of the short-selling ban. Political calculations should not influence the handling of these critical matters, and the focus should be on restoring investor confidence and market stability.