The Financial Services Commission has conflict over the range of short selling ants… It seems like a conclusion next month

Input 2021.01.14 15:04

Chairman of the Financial Services Commission “Limited allowance for some” vs “preferably allowed in front”

The Financial Services Commission is struggling over the allowable range of short selling by individual investors. Short selling is an investment method in which a stock is borrowed and sold, and when the stock price falls, the stock is repurchased and repaid to make a profit.

The reason short selling is often controversial is equity. The current structure is more advantageous for institutional investors and foreigners who can borrow large amounts of stocks from securities companies to sell shorts compared to individuals. This structural inequality is the reason why the FSC is discussing plans to improve the system so that individuals can easily sell short.

Investors who want to sell short usually borrow stocks from securities companies. At this time, brokerage firms prefer to lend stocks in large quantities, tens of thousands of stocks. This is because if a few weeks of small loans are made, the cost of managing them is higher than the loaner fees, resulting in loss. Because of this, there are few places that provide loan services to individuals who want to borrow small stocks, and most securities companies provide loans only to institutions or foreigners.

In reality, only institutions and foreigners can sell short, so it is inevitable that the short selling market is an unfair market for individuals. Individuals account for only 1% of the short selling market in Korea.

In a broader perspective, the Financial Services Commission favors promoting private short selling, such as expanding private loan services for securities companies. However, there are disagreements over the allowable range for short selling. The Financial Services Commission has not been able to decide whether to allow short selling to all individual investors or to allow short selling to qualified investors with special conditions.

According to the financial investment industry on the 14th, it is known that the Financial Services Commission is discussing the extent to which individuals are allowed to sell short selling at the Task Force (TF) to revitalize short selling. TF is expected to announce a plan to revitalize private short selling, which was finalized in February. Short selling will resume on March 16th, and before that, the TF must decide how to allow private short selling.

Inside the Financial Services Commission, it was argued that short selling should not be allowed to all individuals, but only to investors with certain conditions. Those who make these arguments predict that if short selling is allowed to all individuals, there is a risk of a sharp increase in short selling volumes, resulting in greater market volatility. Eun Seong-soo, who oversees and represents the financial authorities, is a representative person who has this opinion.

At the end of last year, Chairman Eun said, “In fact, it would be nice if an individual didn’t go (I don’t want to invest in a short sale),” he said. Like a private equity fund, how about allowing the minimum investment amount of more than 300 million won to professional investors who have investment experience and those who have confidence and can take responsibility.”

When investing with high risk of loss, such as a private equity fund, investment is allowed only to investors who meet the requirements of the minimum investment amount (300 million won) stipulated by the law, and this method should also be applied to private short selling. Although Chairman Eun posted a clue that he was’individual opinion’, it could be said that as the head of the financial authorities, he was deeply aware of the risk of personal short selling.

On the other hand, the side saying that individual short selling should be allowed entirely, pointed out that there is a problem with Chairman Eun’s logic. They argue that it is not logical to allow credit loans to buy stocks by borrowing funds to all individuals, while allowing short selling to only those who meet certain conditions.

Credit loans are investments that expect stock prices to rise and buy stocks out of debt. Short selling, on the contrary, is an investment in which stocks are sold by lending them when the stock price is expected to fall. Although the direction of investment is different, all investors predict the direction of the stock price and trade.

One official said, “I know that some people in the TF think that it is reasonable to allow short selling to all individuals.” Ahn Dong-hyun, a professor of economics at Seoul National University, said, “It is time for the Financial Services Commission to decide how to introduce individual short selling into the stock market with a long-term plan taking into account the characteristics of the short selling market.”