At that time, Sillagen was undergoing clinical trials for anticancer drugs, and malignant rumors about the clinical results spread in the market. Eventually, as the corporate value fell, short-selling transactions to take advantage of short-term trading increased sharply. In mid-April 2018, Shillazen’s share price was around 100,000 won, but fell to around 60,000 won on May 9 of that year as the volume of short selling increased along with malicious rumors. Eventually, Shillazen was designated as an overheated short-selling stock, and on May 10, 2018, short-selling was banned.
Since then, Shillazen’s stock price has steadily declined, and the transaction was suspended in May last year due to adverse factors such as embezzlement and dismissal of former CEO Moon Eun-sang. When the transaction was stopped, the stock price was only around 10,000 won. Even taking into account various environmental factors, Shillazen’s share price was determined to be virtually irrecoverable after the short-selling wave in May 2018.
Celltrion Chairman Seo Jeong-jin holds a press conference on short selling on April 16, 2013./Photo = News 1
In addition, there are many cases of companies damaged by short selling. In April 2013, Celltrion, which was listed on the KOSDAQ at the time, had a sharp increase in short-selling transactions and the stock price was cut in half from 50,000 won to 20,000 won. There is a precedent that Hana Tour and Hotel Shilla also showed weakness in stock prices as short selling transactions increased. Individual investors who bought stocks without knowing anything lost a lot.
Corporate stock price after ban on short selling↑How has the company’s stock price changed after the ban on short selling last year? As of March 13, 2020, the trading day just before the ban on short selling, the stock prices of stocks with the top short selling balances (the amount of short selling or waiting for short selling) in the KOSPI market have mostly risen.
Pyo = Reporter Kim Young-chan
Celltrion’s stock price exceeded KRW 170,000 in March, KRW 300,000 in June, and KRW 400,000 in December. The share price of Lotte Tourism Development has doubled from 9000 won in March to 14,000 won in June, and is maintaining at 15,000 won in January this year. Doosan Infracore’s share price rose from the 3,000 won range in March to the 8,000 won range in June.
LG Display’s stock price declined from 11,000 won in March to June, and has been on an upward curve since then, hitting 21,000 won in January this year. HDC Hyundai Industrial Development also surpassed 23,000 won in May from 14,000 won in March and is currently recording 30,000 won.
The stock price flow was similar in the KOSDAQ market. Among the three places where short selling accounts for more than 10% of KOSDAQ’s total short selling balance, the stock price of Helixsmith rose from the 60,000 won range in March to the 87,000 won range in April. However, from July, the uptrend declined. HLB’s stock price rose from 82,000 won in March to 129,000 won in June and 120,000 won in September.
Graph = Reporter Kim Young-chan
Most of the companies with the top short selling volume in March last year were large stocks or pharmaceutical and bio stocks with high expectations for the future. Even if short selling was not prohibited, conditions for the stock price to rise may have been sufficient.
What did the stock price look like when short selling was banned? In Korea, short selling transactions were banned twice during the global financial crisis in 2008-2009 and the European financial crisis in 2011 and resumed.
During the global financial crisis, short selling resumed on June 1, 2009, and the KOSPI fell 0.46% for one month. However, the 3-month increase rate was 14.7%, and after the short sale resumed, the KOSPI rose. Even during the European fiscal crisis, short selling resumed on November 9, 2011, and the KOSPI fell 1.71% for one month, but the 3 month increase rate rose 10.8%. The KOSDAQ index declined slightly after the resumption of short selling two times, but there was no worrisome collapse.
At the time, the ban on short selling was considered to have a negative impact on stock prices by lowering market liquidity. In fact, during the European fiscal crisis in 2011, the Korea Capital Markets Institute announced the result that both stock market liquidity and volatility decreased when short selling was banned in Korea for three months.
However, it is argued that the market atmosphere has changed since last year’s novel coronavirus infection (Corona 19). Last year, lost investments were crowded into the stock market, and stock market liquidity exploded despite the ban on short selling. Individual investors are concerned that the resumption of short selling could lead to a plunge in stock prices. After the ban on short selling in March last year, the KOSPI’s upward curve has strengthened this belief.
An economics professor who requested anonymity said, “The recent stock market has a different body size and atmosphere from 10 years ago.”
He added, “Apart from the correlation between short selling and stock prices, the resumption of short selling itself will undermine the investment sentiment of individual investors,” he said. “This may cause problems in terms of individual capital liquidity.”