What about the ants… IMF empowered government to resume short selling

The International Monetary Fund (IMF) announced that it is possible to resume short selling in the stock market given the Korean economic situation.

At a press conference on the 28th, Andreas Bauer, head of the IMF’s mission to Korea, said, “After Corona 19, the market is stabilizing and the economy is recovering,” and “I think it is time to resume short selling.” This is interpreted to mean that in the course of recent annual policy discussions with the Korean government, the Financial Services Commission recommended the resumption of de facto short selling.

“Short selling itself is a practice in major financial markets, and it is used as a useful tool in the financial market as it is adopted as a way to manage risk more efficiently, but it is also clear that it has the effect of maximizing market volatility,” said Bauer. Short selling is a method of gaining a profit by expecting a stock price to decline, lending and selling stocks, and then buying and repaying the stock when the stock price falls.

As the stock market plunged in the aftermath of a novel coronavirus infection (Corona 19) in March last year, the Financial Services Commission temporarily banned short selling for six months to stabilize the market and extended it for another six months in September last year. Korea and Indonesia are the only countries that banned short selling last year and have maintained it until now. France, Italy, Taiwan, and Malaysia banned short selling and ended last year, and the United States, Japan, and the United Kingdom did not ban short selling at all.

While short selling has a net function of stabilizing the overheated market, there is a problem that when the stock price falls, it increases downward pressure and raises market uncertainty. Individual investors and the ruling party argue that the ban should be extended or abolished altogether because short selling is a’tilted playground’ which is advantageous to institutions and foreigners. Political circles are pressing for extension measures, conscious of the votes of individual investors, ahead of the re-election in April.

On this day, the IMF said, “We are telling you that our views are considered in terms of market efficiency,” and “short selling itself is a common practice in major financial markets. It supports activities related to price discovery by market participants and manages risks in the market. “We are adopting it in an efficient way.” In short, short selling in the financial market has the effect of amplifying volatility when the market fluctuates, but it also has positive effects such as price stabilization in the market.

However, the IMF made it clear that this recommendation is not at the level of prohibiting a temporary short sale ban.

“If there is a very serious market shock, it doesn’t mean that we have to keep short selling,” said Bauer. “When we talked with the Korean government, there are many concerns about the accessibility of short selling and the use of short selling by individuals. I also understand the points,” he said. It seems that the Korean government has given strength to the government’s position on the resumption of short selling. In fact, some analyzes that the resumption of short selling will not have a significant impact on the stock market. Even during the global financial crisis (October 2008-May 2009) and European fiscal crisis (August-November 2011), short selling was banned and resumed, but the stock price did not decline significantly.

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