Short sales resume after the election? Horned ants pick’Korean version of the game stop’

The controversy over short selling has seldom cooled. The Financial Services Commission decided on the 3rd to extend the ban on short selling until May 2. Even if short selling resumes on May 3, short selling is allowed only for large stocks such as KOSPI 200 and KOSDAQ 150. Partial resume.

Finance Commissioner Eun Seong-soo announced the information and said, “I will put an end to the controversy,” but the backlash from individual investors and foreign investors continues. Individual investors protested as’election measures’ due to a short extension period, while foreign investors openly voiced opposition, saying that they are’a country banned from short selling for the longest term’. We have summarized the controversy surrounding short selling.

Short selling is an investment method in which stocks you do not own are borrowed and sold, and then stocks are bought back after a certain period of time. If the stock price falls, you can make a profit by buying and paying off the stock at a lower price than the borrowed price.

Short selling is noticeable to investors who buy stocks in anticipation of a rise in stock prices. In particular, for individual investors who have limited short-selling investment than institutions and foreigners, short-selling is regarded as the main factor in the stock price decline. There is also a lot of criticism that it is a’tilted playground’ that is advantageous to institutions and foreign investors.

Individual investors are hated, but the financial sector and academia also recognize the net function of short selling. The price discovery function allows overvalued stocks to find an appropriate price, and it also plays a role in lowering transaction costs by supplying abundant liquidity to the market.

South Korea banned short selling from March 15 last year. This was taken when the stock market plunged due to Corona 19. Twelve countries, including Spain, France, and Taiwan, took the same measures. However, only Korea and Indonesia have banned short selling so far, and Indonesia will resume short selling this month.

The delay in the resumption of short selling is to improve the short selling system, which is, on the surface, unfavorable to individuals. As of 2019, the share of individual short selling in the domestic stock market was 1.1%. It was difficult for individuals to borrow stocks for short selling, and it was difficult to invest in short selling due to the mandatory repayment period.

Yoo Geun-tak, an analyst at Kiwoom Securities, said, “As the market’s main force changes into individual investors in 2020, the discriminatory system against individual investors can provoke considerable opposition, so it has no choice but to resume after a certain level of equality is achieved.”

However, there is more attention that political pressure is the main reason for the extension of the ban on short selling. In particular, the political circles conscious of the votes of individual investors, especially the ruling party, are under intense pressure ahead of the re-election of the mayors of Seoul and Busan. Prime Minister Jeong Sye-gyun also added his strength on the 14th of last month, saying that it was a “bad system”. It is said that the ruling party’s demands for extension of the ban on short selling have also been inundated in the coordination between the parties. An official from the financial sector said, “No one can see it as being conscious of the April by-election and delaying the decision.”

Although the ban on short selling has been extended, backlash from individual investors continues. First of all, the period for banning short selling has been shortened to May, not June. Moreover, although the Financial Services Commission announced a partial resumption, in reality, it is dissatisfied that it is no different from a full resumption. The short selling balance of KOSPI 200 stocks is 94.4% of the total short selling balance of KOSPI.

Individual investors are also predicting the’Korean version of the game stop movement’. The intention is to inflict significant losses on short selling forces by intensively buying stocks such as Celltrion with a large short selling balance. In fact, foreign investors such as Goldman Sachs are reducing the number of short selling such as Celltrion and HLB. According to the Korea Exchange, Goldman Sachs fell from Celltrion on the 1st and Credit Switzerland from HLB from the list of large-scale short selling balance holders.

On the 4th (local time), Bloomberg News published an article stating that the world’s longest-term banned short selling countries are putting their stock markets at risk of falling. An official from AMP Capital, a fund management company based in Sydney, Australia, said, “It is a surprising decision to extend the ban on short selling even though the Korean stock market is bullish,” and said, “The liquidity of the market could drop sharply and the stock price could collapse.”

Foreign investors mainly use the long-short strategy of buying undervalued stocks (long) and short selling or selling (short) overvalued stocks. It is a risk hedging tool. “As short selling is banned, falling bets on overvalued stocks are delayed and accumulated,” said CIO, Macquarie Investment Trust Management’s Stock Management Division.

Some forecasts that there may be penalties when rebalancing the Morgan Stanley Capital International (MSCI) index. The rebalancing of the MSCI index is scheduled for May 13th. Researcher Seol Tae-Hyun of DB Financial Investment said, “Short selling is necessary to prevent the churn of passive (index-following) funds.” In fact, Turkey, which enforced a long-term ban on short selling in June last year, was warned that its market rating could be downgraded. According to Samsung Securities, up to KRW 850 trillion of funds is analyzed to be within the influence of the MSCI index.

Some analysts say that short selling does not exert much power on the stock price movement. The Korea Exchange stated that “the argument that short selling causes stock prices to fall has not been proven theoretically or empirically.” A similar analysis comes out in stock prices. Lee Jin-woo, manager of the investment strategy team at Meritz Securities, said, “(Resumption of short selling) will not have a significant impact on the market.”

However, there are other prospects for the KOSDAQ market. Researchers Kang Dae-seok and Heo Jae-hwan of Eugene Investment & Securities said, “In the KOSPI market, the resumption of short selling will not have a significant impact, but the impact will be more pronounced on the KOSDAQ.” It will be more unfavorable.”

Reporter Ahn Hyo-seong [email protected]