[긴급점검! 공매도①] ‘Another postponement’ short selling, the prerequisite for reopening

[이코노믹리뷰=정다희 기자] The ban on short selling was extended one more time until May 2nd. In March last year, as the market cooled in the aftermath of the coronavirus infection, the financial authorities imposed a temporary ban on short selling for all listed stocks. In September of last year, the ban on short selling was extended once. Short selling, which was about to resume in March, was delayed after a month and a half as a result of an extraordinary meeting of the Financial Services Commission on the 3rd of this month.

Even when short selling is resumed, the company plans to minimize the impact on the market by partially restarting the constituents of the KOSPI 200 and KOSDAQ 150 index, rather than restarting all stocks at once. With these measures, the financial authorities temporarily halted the backlash from individual investors, while securing an additional month and a half for institutional improvement. Investors are drawing attention to the direction of the domestic short-selling system, which has been called an inclined playground and has become synonymous with information asymmetry.

Nowadays, when the slanted playground is regarded as the favor of short selling, the controversy over short selling is hotter than ever. With the revision of the Capital Markets Act and this extension, which contains reinforcement of penalties, the fierce opposition of individual investors is expected to subside for a while, but improving the accessibility of individual investors to information remains a challenge.

The lack of personal information compared to institutions and foreigners is one of the biggest reasons individual investors oppose the resumption of short selling. When institutional and foreign investors make short selling based on their powerful intelligence and financial power, the stock price is under pressure from their selling volume, and individual investors will suffer the loss.

The difficulty in accessing short selling by individual investors compared to institutional and foreign investors is a typical example of a slanted playground. Although it is not practically impossible, the fee for borrowing stocks is higher than that of institutional and foreign investors, and the deadline for repaying them is short. Some point out that there are many cases where the stock price of a specific stock is expected to fall sufficiently, but due to the limited supply of large stocks, the stock cannot be borrowed.

Short selling is largely carried out through credit loan transactions for individual investors and loan transactions mainly by institutional and foreign investors. Currently, in the case of credit loan transactions, the number and quantity of stocks that can be sold short are small, as stocks can be lent through securities finance or only in the stock company’s own pool. In addition, an amount equivalent to 100% of the borrowed stock must be held as margin, and 140% of the stock valuation must be provided as collateral. The number of securities companies that provide services is limited. Currently, only six securities companies, including NH Investment & Securities, Shinhan Investment, Daishin Securities, SK Securities, Yuanta Securities, and Kiwoom Securities, are providing credit lending services. Of these, Yuanta Securities is only provided within its own pool.

In the case of lending transactions, the stock lending system operated by the Korea Securities Depository is used. There is a large pool in which securities companies, national pensions, and foreign institutions can borrow. Margin is not required and the collateral is 105% of the stock valuation. The deadline for repurchasing stocks can be extended continuously, making it possible to borrow indefinitely. However, if the lender requests repayment, the borrowed stock must be repaid immediately.

A study found that there is a big difference between short selling with the absolute majority of institutional and foreign investors and the credit transaction rate of individual investors. According to the thesis’Investment Performance of Short Selling and Credit Transactions’ published by Eun-ah Lim, Ph.D. in Finance Education at Hanyang University and Professor Jeon Sang-kyung of Hanyang University Business School, the return on investment from short selling, mainly foreign and institutional investors, far exceeded the return on investment in credit transactions. As a result of analyzing daily short selling and credit transactions for three years from June 2016, when short selling balances for each item were disclosed on the short selling general portal of the Korea Exchange in accordance with the obligation to report short selling balances under the Capital Market Act, the average daily investment return of short selling was 1.2 billion. At 10,000 won, it was about 39 times higher than the credit loan investment (31.8 million won).

Even when the stock market slumped in the aftermath of Corona 19, short selling did not have a big impact on the market in several financially advanced countries such as the United States and Europe. This is why some point out that Korea’s short selling system and practices have not been advanced. Korea and Indonesia have not yet resumed short selling.

In advanced overseas financial markets such as the United States, Europe, and Hong Kong, the computerized loan transaction system has already been introduced. On the other hand, in Korea, transactions are still made by hand or via email or messenger. Such a transaction is disclosed through the Financial Supervisory Service, which takes 2 trading days. Information is not shared in real time unless they are participants of the transaction, resulting in a structure in which individual investors who have less accessibility will hit the back.

Restrictions on short selling stocks and quantities for individual investors also appear to be a challenge. In the case of Japan, specialized supply organizations are trained to supply stock loan resources through a centralized method. For this reason, there are almost no restrictions on the stocks and quantities that can be sold shortly in the stock rental service for individual investors. Even securities companies do not have to bear the credit risk arising from the rental service. According to the research paper “Comparative Study on the Stock Credit Trading System between Korea and Japan,” by Hwang Se-Woon of the Capital Market Research Fellow, Japanese individual investors’ short sale transaction amounts accounted for 23.5% of all short sale transactions as of 2017.

The level of punishment for illegal short selling is also different. The United States can deliberately imprisonment for not more than 20 years or fine up to $5 million (about 6 billion won) if it deliberately sells without borrowing and fails to settle. In France, administrative dispositions, including business suspension, and fines of up to 100 million euros (approximately 130 billion won) or up to 10 times the amount of unfair gains are possible. In the UK, there is no upper limit on fines for illegal short selling.

According to the Financial Supervisory Service, 45 out of 101 financial investment companies that were sanctioned for illegal short selling for 10 years from 2010 were imposed fines. The remaining 56 were at the disposal of the Lord. This is why criticism comes out that a cotton bat is a punishment.

On the 3rd, the financial authorities released clarification data on the previous suspicion, and informed the current status of the system and the improvement of the financial authorities. The Korea Exchange, Korea Securities Depository, Korea Securities Finance, Koscom, and Financial Investment Association participated in the answer.

The Korea Exchange explained that countries with open capital markets such as the United States, Japan, Germany and Hong Kong are adopting the T+2 payment method. It is explained that in a market where foreign capital is open, it is inevitable to grant a period of at least one day or more for smooth settlement of investors. However, the problem is that it is difficult to detect when an illegal short sale transaction is conducted in the form of selling stocks that are not owned by abusing institutions and foreigners rather than a settlement system and buying them on the same day.

The Korea Exchange then announced that it plans to develop a new technique to detect illegal short selling and begin inspection from March. As a result of checking with the exchange, it is a real-time monitoring technology rather than a system that extracts illegal short selling.

In response to the fact that the revised punishment standards are still weak, the Korea Exchange said, “From April 6th, due to the revision of the Capital Markets Act at the end of last year, criminal penalties such as penalties within the order amount and imprisonment for more than one year are imposed on those who make illegal short sales. It became possible.” “There is a view that the punishment is weak because the law states that it is imprisonment for one year or more. Explained.