Is short selling bad?… 6 out of 7 resumed short selling

Input 2021.01.19 08:59 | Revision 2021.01.19 10:22

While there were voices of concern about the index decline if short selling was resumed, mainly in politics, it was found that there were many cases where short selling was banned and resumed domestically and abroad. It is analyzed that the market will not be hit hard if short sales are resumed during the stock market boom.

Short selling is an investment technique that borrows and sells stocks when stock prices are expected to fall, and then buys them at a low price and repays them when the stock price falls. The government banned short selling for six months for the purpose of stabilizing the stock market in March after the stock price plummeted due to the novel coronavirus infection (Corona 19) last year. This measure was extended in September. Short selling transactions are scheduled to be allowed again from March 16th.

If short selling resumes, there are concerns about a decline in the share price, but in the past, the damage was not significant.

In Korea, short selling transactions were banned twice during the global financial crisis in 2008-2009 and the European financial crisis in 2011, and then resumed. The KOSPI index fell slightly during the first month, but then rebounded.

At that time, the KOSPI index fell 0.41% (May 29, 2009 to June 30, 2009) and 1.71% (November 9, 2011 to December 9, 2011) for one month after the resumption of short selling. However, the three-month growth rate recorded 14.03% (May 29, 2009-August 31, 2009) and 5.61% (November 9, 2011-February 9, 2012), respectively.

The case of other countries that recently resumed short selling transactions is similar. There are a total of 7 countries (excluding countries partially banned) that completely banned short selling in the same way as Korea last year and resumed. Among them, six European countries, including Austria, Belgium, France and Greece, ended on May 18 last year, and on December 31 last year in Malaysia.

Of the seven countries that banned and resumed short selling, six European countries rose in the index for a month after the resumption. A survey of the major indices of each country showed that Austria’s ATX index rose 5.30% over a month (May 18-June 18 last year), showing the lowest growth rate. The index with the highest rate of increase was the Italian FTMIB index, which rose 11.97% during this period.

To this day, these countries are showing an increase of more than 20% in major index stock prices. Spain’s IBEX index so far (May 18-January 15 last year) recorded the lowest growth rate at 21.40%. During the same period, Austria’s ATX index recorded the highest gain at 33.43%.

Hwang Se-woon, a research fellow at the Capital Markets Research Institute, said, “The European stock market does not disclose the current status of short selling transactions in detail as in Korea.” However, as in Korea, the share of short selling transactions by individuals is lower than that of institutions and foreigners. It is known that the proportion is higher than that of Korea.”

Malaysia, which banned short selling until the end of last year, is also not hit hard. Malaysia’s KLSE index fell 0.01% from 1627.21 on December 31 last year to 1627.01 on January 15. Moreover, the KLSE index was 1684.58 on December 11 of last year, which was the highest price of the year and fell, so it is evaluated that it was good.

Research Fellow Hwang explained, “In the period when stock prices rise under the support of the real economy, resuming short selling transactions as in Europe last year will not hurt much,” he explained. “It is difficult for investors to sell short with the risk of loss.”

He continued, “The stock market is currently undergoing a short-term adjustment, but the conditions are very good from a mid- to long-term perspective.” said.

On the other hand, as the KOSPI exceeded 3000 and the domestic stock market marched high, individual investors insisted to postpone the resumption of short selling once more, which could instigate a decline in stock prices. In addition, the Democratic Party insisted that the ban on short selling should be extended, starting with Rep. Park Yong-jin, as well as the supreme commissioner Yang Hyang-ja.