Short selling’hot potatoes’… Authorities “resume” personal “cool water on the rise”

Finance Commissioner Eun Seong-soo is attending the emergency economic central countermeasure headquarters meeting on the 13th. On the 11th, the Financial Services Commission announced its plan to resume short selling. [뉴스1]

Short selling has become a hot potato that will affect the election regime beyond the stock market. Individual investors, ruling parties, and financial authorities are setting up their respective short sales on March 16, which was stopped due to the novel coronavirus infection (Corona 19). It is argued that the resumption of short selling, which is a’sloping playground’ only for institutions and foreigners, can pour cold water on the stock market that exceeded the KOSPI 3000 line and lead to damage to individual investors represented by Donghak ants.

Few systems are hated by individual investors like short selling. Short selling is an investment technique in which stocks without short selling are borrowed, sold first, and then bought back after a certain period of time. It is a structure that makes money only when the stock price falls. It is not good for investors who buy stocks in anticipation of an increase in stock prices. In addition, there is also the frustration of individual investors that they cannot meet foreigners and institutions armed with intelligence and financial power. However, it also has a net function of preventing the market from overheating.

Short selling bans in 2020. Graphic = Younghee Kim [email protected]

◆ Financial Services Commission “Resume Short Sale”= The Financial Services Commission announced in the’Position on Resumption of Short Selling’ submitted to the National Assembly’s Political Committee in November last year, saying, “At the end of the ban period, we will resume short selling in principle, taking into account the global reliability of the stock market.” Among the countries that temporarily suspended short selling due to Corona 19, only Korea and Indonesia are maintaining it.

Short selling allowances are used in the evaluation of various global index calculators. The financial authorities view that if the ban on short selling is prolonged, the domestic stock market may be disadvantaged. It is also necessary for the advancement of the capital market. One of the net functions of short selling, the price discovery function (appropriate price formation), plays this role. In the process of lowering the stock price due to short selling, the actual physical strength of the company may be revealed to the company. There is also a view that the market bubble (bubble) can land softly through an adjustment process through short selling rather than bursting at once.

Rep. Yoon Chang-hyun, former president of the Korea Financial Research Institute, said, “It is not right to ban short selling assuming panic selling in a situation where the stock market is so hot that there are concerns about panic buying rather than panic selling.”

The history of short selling bans. Graphic = Reporter Kim Young-ok [email protected]

◆Donghak ant “Catalyst for stock price decline”=Individual investors are obsessed with’short selling phobia (fear)’. There are concerns that it could act as a catalyst for the stock price decline. Eui-jung Eui-jung, CEO of the Korea Stock Investors Association, said, “Short selling eats a drop in stock prices, but if short selling resumes, the market will spill out.” “Donghak ants, who could not withstand the decline in stock prices, will exit the stock market and the Korean stock market will be damaged. “He raised his voice.

Professor Seong Tae-yoon of Yonsei University said, “I think it is appropriate to resume short selling while the gap between the asset market and the real economy has narrowed. If the stock market is still unstable and resume short selling, a hard landing may occur and shock.

The objection is also difficult. Hwang Se-woon, a research fellow at the Capital Markets Research Institute, said, “There was no decline in stock prices when short selling was stopped and resumed twice in 2008 and 2011 during the global financial crisis and the European financial crisis.”

◆The ruling party “Resume the responsibility of the authorities to resume short selling”The controversy over resuming a short sale has become a hot potato. It looks like the steps are twisted as they weigh the votes they will have for the Seoul and Busan mayoral by-elections that take place 15 days after the resumption of short selling. The possibility of the authorities being swayed by the ruling party’s tough position cannot be ruled out.

At the Political Committee of the National Assembly, the opposition parties recognized the net function of short selling and decided to focus on improving the system. A bill containing these details was passed, and the relevant enforcement decree was also announced on the 13th. However, the ruling party is raising its voice over the extension of the ban on short selling. When the Financial Services Commission sent a text about the resumption of short selling on the 11th, Democratic Party lawmaker Park Yong-jin argued, “Resuming short selling without correcting injustices and institutional insolvency is the financial authorities abandoning responsibility.” As the bills they initiated and passed were insufficient, they said they needed more system improvement.

Professor Kim Jeong-yeon of the Graduate School of Law at Ewha Womans University said, “In the event of an economic crisis, the ban on short selling tends to be allowed indefinitely if the authorities want to, without spending money.” “There is a legal arrangement such as allowing the appropriateness of the ban to be judged every three months. I need it.”

How to improve short selling. Graphic = Reporter Kim Young-ok [email protected]

◆“Let’s fix the broken traffic lights first”= The urgent need to close the controversy surrounding the resumption of short selling and to come up with constructive alternatives is the restoration of trust. This is because the trauma of individual investors such as Celltrion in 2012, Hanmi Pharmaceutical’s short selling using undisclosed information in 2016, and illegal non-borrowing short selling of Goldman Sachs in 2018 is too great. The Financial Services Commission has been pursuing system improvements such as ▶ strengthening punishment for illegal short selling ▶ supplementing the system for market makers ▶ improving accessibility for short selling by individual investors. In particular, in the case of illegal short selling, imprisonment for one year or more or a fine of up to five times the unfair gains and a penalty was imposed.

Rep. Park Yong-jin said, “The post penalty has been strengthened, but there is no pre-blocking system yet.” “It is not correct to resume traffic while the traffic light is broken.”

Seoul National University Economics Professor Dong-Hyun Ahn said, “Illegal short selling was difficult to detect, and the punishment was very weak even if it was caught.” “We need to raise the level of punishment and restore trust of individual investors by punishing the brokerage company for the illegal short selling transaction. I do” he said. According to data from the Financial Services Commission, 49 companies (42 foreign countries, 7 domestic) were caught for illegal short selling over the past 10 years, but the cumulative penalty was only 9.4 billion won.

Reporters Ahn Hyo-seong and Hong Ji-yu [email protected]