[취재파일] Announced short sale resumed… Restless ants

The controversy is hot over the resumption of short selling, which was announced two months in the future. A national petition requesting the permanent abolition of short selling is also gaining consent from 120,000 (as of the morning of the 15th). With individual investor funds being pushed into the stock market on record, it is not surprising that the opposition to short selling is heard louder than before. Money is released at low interest rates, real estate prices are too high, and there are elections in April. There seems to be a number of worries over whether to resume short selling as well as when and how.

In fact, there is no big disagreement among experts on the effect of short selling. Is it possible to fully calculate the value of a company and reflect it in the stock price? Even if it is possible to calculate, the price at a certain point in time is meaningless at the moment. In the end, the market is a continuation of an endless process in which a large number of participants find the right price. From the perspective of the efficiency market hypothesis that the price is the result of reflecting the information and prospects of the participants, the more participants, the more accurate the price. In that sense, it makes sense for people with negative outlooks on companies to participate in the market, and short selling is the institutional pathway for doing so. This is the’price discovery’ function commonly referred to as the net function of short selling.

But from the standpoint of individual investors, why is short selling so unfavorable? Individuals are more difficult to participate in short selling than institutions. The period in which you can borrow stocks is short, and the fees for borrowing are higher. There is also a difference in intelligence. How many individual investors can invest by visiting companies or by calling the corporate IR department? The system is disadvantageous and the information power is also disadvantageous. 99% of short selling in Korea is made by institutions and foreigners. However, the act of selling itself, of course, acts in the direction of the stock price decline, so it is up to institutions and foreigners to bet on the outlook for stock price declines and the resulting gains. In this situation, it’s hard to hear the saying, “In fact, this price is the more accurate value of the company. You’re investing in stocks in markets where there is a more accurate price thanks to short selling.”

Accidents in recent years have also raised distrust. In 2018, Goldman Sachs was caught short selling without borrowing. The point that Goldman Sachs strongly appealed to at the Securities and Futures Commission, which discussed discipline at the time, was that it was “not intentional, not a systematic error, but a one-time’human error'”. In the same year, Samsung Securities’ ghost stock crisis was also concluded by an employee’s mistake. What kind of suspicion did individual investors have when they saw that stocks that were actually missing were traded even though people entered the numbers incorrectly?

Research results surrounding short selling are mixed in various forms. Of course, it cannot be compared directly because the analysis period, target, and method are different. There is a study (Jin Jin Lee, Journal of the Korean Management Association, 2019) that shows that short selling does not necessarily increase before the announcement of bad news is released. There is also a study that shows that this trend is more severe for companies with a lower level of structure (Im Hyun-il, Korea Corporate Governance Agency report, 2020). If the two studies were viewed from the standpoint of the information trader’s theory that those with negative information would go on short selling, other studies that looked at the relationship between the existence of short selling and the stock price/earnings did not clearly agree on the direction.

The government aimed to increase the accessibility of short selling by individual investors and strengthen the punishment for non-borrowing short selling. Previously, only a small penalty was imposed, but a plan was put in place to charge a penalty based on the amount of unfair gain. However, it remains to be seen how strictly the system can be operated, as it is difficult to detect systematically, and only 45 out of 101 illegal short sales were detected in the past 10 years. In any case, if short selling resumes after two months according to the policy of the Financial Services Commission, what kind of stocks have short sells now, and what will be the size of the balance (stocks that have not been paid back, usually interpreted as short sales), etc. It seems that things are bound to increase.