It seems that only 15% of listed companies will allow short selling… First, from the KOSPI 200

◆ Re-extending ban on short selling ◆

On the 3rd, the announcement of a one-and-a-half month extension of the ban on short selling, chairman Eun Seong-soo, is interpreted as a measure to eliminate the controversy over short selling that has spread beyond the stock market to the politics.

At a briefing that day, Chairman Eun announced that he would extend the ban on short selling of all listed stocks in the securities, KOSDAQ, and KONEX markets for an additional month and a half. This is a month and a half increase from March 15th to May 2nd, when the ban on short selling ends. Considering that the ban on short selling was first imposed in March last year, the ban on short selling is all one year and two months.

In addition, even if short selling is resumed from May 3, it is decided to allow only KOSPI 200 and KOSDAQ 150 constituents with large market cap and rich liquidity. In the securities market, the share of the market cap of KOSPI 200 stocks is 88%, and the share of the market cap of KOSDAQ 150 stocks in the KOSDAQ market is 50%. For the remaining 2037 stocks, the ban on short selling will be extended without a separate deadline.

Chairman Eun explained, “For the partial resumption of some stocks, we referred to Hong Kong’s partial short selling method and policy experience in which non-financial stocks first resumed short selling after the 2008 global financial crisis.” The Financial Services Commission clarified the principle of resuming short selling of large stocks from May 3rd. In the case of the rest of the stocks, it has been announced that it has decided to separately determine the method and timing of resumption in the future, taking into account the effect of the ban on short selling and the market situation.

The Financial Services Commission plans to finish improving the system and establishing the system during the additional short selling ban period. First, the exchange market monitoring function is reinforced by improving the detection cycle for non-borrowing short selling on a monthly basis from the previous half year. A computer system is also established to store information on loan transactions for the purpose of short selling for 5 years. In addition, it secures 2 to 3 trillion won of large stocks through securities companies and insurance companies so that stocks can be lent to individual investors. As a result, when short selling resumes, individual short selling of most of the KOSPI 200 and KOSDAQ 150 will be possible. Daeju securities firms will also increase from six to more than ten. In addition, the Financial Services Commission plans to implement system reforms, such as reducing short selling by market makers by less than half.

The Hong Kong-style short selling designation system referred to by the FSC is a system that prohibits short selling only for stocks with a small market capitalization. For example, short selling is permitted only for stocks with a market cap of 3 billion Hong Kong dollars (about 430 billion won) or more and a 12-month turnover (the rate at which stockholders change) is 60% or more. The Hong Kong Exchange regularly checks and changes designated stocks.

Previously, the political circles and the Financial Supervisory Service raised the need for this system. Financial Supervisory Commissioner Yoon Seok-heon said at last year’s national audit, “It is worth considering the Hong Kong-style short selling system.” The Financial Supervisory Service analyzes that short selling of small-cap stocks, which is easy to control the market price and has a high proportion of individual investors, needs to be restricted.

As the government has not fully lifted the ban on short selling, there are concerns about the outflow of foreign funds in the stock market and polarization of supply and demand by stock. This is because foreigners who emphasize freedom of investment can adjust the share of global investments in Korea if they are classified as always prohibited short selling according to foreign evaluation. Considering the aspect that the International Monetary Fund (IMF) recommended the resumption of short selling while talking about stabilizing the Korean financial market, criticism has been raised as a policy that goes against the flow of global capital markets.

The biggest problem is that the Financial Services Commission decided to extend the ban on short selling to prevent stock prices from falling due to pressure from politicians and individual investors, but rather, it could trigger an outflow of foreign funds, leading to a decline in stock prices.

The government could lose both the cause of normalization of the capital market and the fact of rising stock prices. The biggest issue is whether the proportion of Korea in the Morgan Stanley Capital International (MSCI) Emerging Countries (EM) index, which has a global investment of over 2,000 trillion won, is reduced. Among the funds following the MSCI EM index, Korea accounted for 13.4%, or about 35.7 trillion won. If MSCI cuts this share by 1 percentage point due to the restrictions on free investment due to the ban on short selling, it could lead to a decline in the stock price with net selling of about KRW 3 trillion in one day.

Hwang Se-woon, a research fellow at the Capital Market Research Institute, said, “The proportion of foreign investors holding stocks is as high as 30%, and as they value the international coherence of the capital market system, the uncertainty in the system may increase the inconvenience of investment.” Foreign investors have raised the need to resume short selling in Korea, and the international flow chart in which most short selling is allowed cannot be ignored. Ahn Hee-joon, president of the Korean Securities Association (Professor Sungkyunkwan University) said, “It is important to give the market trust and maintain consistency, but this postponement is unfortunate in that regard.” “There is also a study showing that the short selling system helps increase market efficiency and reduce price volatility. There are many” he said.

[강계만 기자 / 진영태 기자 / 김정범 기자]
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