Source: Zhitong Finance App
After the ban on short trading was announced, the South Korean stock market soared.
The main indices of the South Korean stock market soared across the board on Monday, after the country's regulators re-imposed a comprehensive ban on shorting for about 8 months. South Korea's regulators hope to put an end to the illegal use of short trading strategies in order to curb stock market turmoil.$Korea Composite Index (.KOSPI.KR)$It once rose more than 4% in early trading on Monday, with LG Energy Solution Ltd. and Posco Future M Co. gaining the most. At one point, the Kosdaq Index, the benchmark for the Korean GEM market, which is dominated by small-cap stocks, rose as high as 4.4%.
At a press conference on Sunday, Kim Joo-hyun, director of the Korea Financial Services Commission (FSC), said that based on concerns about increased market volatility and illegal short selling, it may disrupt market stability and the formation of fair prices.The FSC decided to completely suspend stock shorting from Monday's trading session until the end of the first half of next year.
The Korea Financial Commission said on Sunday that from the beginning of the trading period on Monday until the end of June 2024, new short trading of the Kospi 200 Index and Kosdaq 150 Index stocks will be prohibited. According to information, it was not until May 2021 that the restrictions on the short sale and sale of borrowed stocks for these two major indices were lifted until May 2021, so the latest adjustments only covered these more than 300 stocks with the largest trading volume.
Foreign investment has set off a shorting frenzy, and South Korean shareholders are collectively opposed
The move comes on the eve of South Korea's April National Assembly (National Assembly) election, and the South Korean public's views on shorting stocks are still very negative. Some lawmakers from the ruling party urged the government to temporarily stop stock short trading in response to demands from retail investors. Retail investors have already staged a number of protests over this.
According to information, most of South Korea's shorting transactions are carried out by foreign institutional investors. According to the data, the recent behavior of foreign investors in the stock market has caused South Korean shareholders to collectively oppose — the net sale of 2.9 trillion won of stocks in October was not only net sales for 5 consecutive months, but also the largest capital outflow since June 2022.
At this point in time, news broke out in the media that “South Korean regulators investigated two international investment banks suspected of having bare 56 billion won stocks,” triggering intense criticism from retail investors to members of the South Korean National Assembly about illegal shorting. South Korea's financial supervisory authority has announced the establishment of a special task force to investigate the illegal shorting of all international investment banks. Kim Joo-hyun said at a press conference on Sunday that amid market turmoil, South Korean regulations have discovered large-scale and large-scale illegal naked short selling by international investment banks, as well as other illegal activities.
Huh Jae-Hwan, an analyst at Eugene Investment & Securities, said the latest ban was “unusual,” mainly because South Korea's regulatory authorities issued a comprehensive order prohibiting short trading in the absence of a financial crisis.
Earlier this year, South Korea's Kospi Index soared as global investors frantically bought electric vehicle battery-related stocks and chip stocks related to artificial intelligence topics in the Korean stock market. However, investors' concerns about geopolitical tension and the Fed's long-term maintenance of high interest rates have reversed the gains in the South Korean stock market in recent months. Bearish forces have further fueled the situation, pushing the index into a technical bear market range, almost erasing all gains since this year.
South Korea's financial regulator said that the stock market has been disrupted due to large-scale naked short selling by foreign investment banks. In South Korea, normal short selling involves two steps: lending securities and selling. Naked air, as the name suggests, means that traders operate short selling without securities financing or confirmation that securities can be financed. This kind of trading behavior is prohibited in South Korea.
Regulators said they are currently seeking to improve measures to create a more level playing field for retail traders and investors, and implement a more severe punishment mechanism for traders or institutions that violate trading rules.
In March of this year, South Korea's financial regulations issued fines totaling about 6 billion won against UBS and ESK. This is also the first naked ticket executed in accordance with the revised rules of South Korea's “Capital Market Act.” Previously, the penalties for naked air violations were generally light in South Korea, and the new rules raised the maximum fine to “up to 5 times the amount of illegal gains.” When the illegal naked air trade was revealed in October, South Korean regulators said the size of the fine was expected to set a record.
The shorting ban may have a “side effect” on the Korean stock market
Although regulators argue that naked air behavior inhibits fair price formation mechanisms and harms market confidence, some market observers say that blocking all shorting channels due to nakedness may have a negative impact. They say that a complete ban on shorting transactions will reduce market transparency, thereby reducing attractiveness. Some say these restrictions may prevent global index provider MSCI Inc., from upgrading the Korean stock market from an emerging market to a developed market.
Gary Dugan, Chief Investment Officer of Dalma Capital Management Ltd., said: “This has indeed damaged their market position and will definitely prevent them from gaining an investment position equal to that of developed markets. As the ban takes effect immediately, the stock prices of companies that have been shorted will initially rise sharply, but the impact may be limited, mainly because the overall level of short positions in the market is actually low.”
Brian Freitas, an analyst from Smartkarma, said that the shorting ban would further damage South Korea's chances of moving from an emerging market to a developed market. Freitas added that targets favored by retail investors in the stock market may form investment bubbles because of the lack of short trading, ridiculous valuations are difficult to suppress.
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