Why is the Financial Services Commission trying to resume short selling? “Big net function”
“There are many advantages such as price discovery, bubble easing, and incorporation into advanced markets”
“Korea has more harm than pure function”… Backlash public opinion is a burden
(Seoul = Yonhap News) Securities Team = In spite of the backlash of individual investors against short selling, interest is drawn to the background as the financial authorities suggest a policy to end March of a temporary ban on short selling.
Market experts generally view that it is desirable to resume short selling unless in special circumstances considering the net function of short selling price discovery.
Short selling is essential for the market to operate more efficiently. As such net function is difficult to perceive, only the negative side of short selling can be highlighted among ordinary investors.
“There are many people who don’t know why the short selling system is necessary,” said Hwang Se-woon, a research fellow at the Capital Markets Institute. “The most important net function is the price discovery function that enables the market to move efficiently, but it is true that it is not easy to experience.”
Research Fellow Hwang cited a case where the stock price of Company A fell from 10,000 won to 8,000 won due to a factory fire.
He said, “It is reasonable for the shareholders to bear the responsibility for corporate value decline due to the fire,” he said. “If there is a short sale, the stock price is adjusted to 8,000 won at a time, so that the existing shareholders are responsible. In the process of going down, there may be a phenomenon that the responsibility is handed over to new shareholders.”
One of the net functions is the easing of the market bubble following this price discovery function.
Researcher Hwang said, “If short selling is frequently made in the bitcoin market, the current high volatility will have some mitigation effects,” he said.
IBK Investment & Securities Research Center Director Jeong Yong-taek said, “As the authorities pointed out that the current stock market is overheating, there will be an intention to highlight the net function of short selling to cool off overheating.” It seems that policy stability will be considered as well as it has been postponed once.”
Some say it seems realistic to resume short selling even for a stable inflow of foreign investment funds.
Samsung Securities’ investment information team leader Jung Myung-ji said, “In order for the Korean stock market to become advanced, it must be incorporated into the advanced market of Morgan Stanley Capital International (MSCI). If short selling is prohibited, it cannot be incorporated into advanced markets.”
He said, “In the process of raising the KOSPI above the 3,000 line, I personally express the role of Donghak ants as’I found the stolen ones.'” But he said, “We need the power of a foreigner to go up a level here.”
However, team leader Jeong said, “Investors who think that the short selling system is a’tilted playground’ are not wrong.” “Ultimately, the resumption direction is correct, but how to balance the short selling market focused on foreigners will be key.” Added.
However, the position against short selling is still strong. In the Korean stock market, the harm is far greater than the net function of short selling.
Korea Equity Investors Association CEO Eui-jung Eui-jung said, “Foreign short selling is all about the reason why Korea is forbidden, but from the standpoint of individual investors, there is no country that suffers from short selling as severe as Korea.”
“Foreigners occupy more than 70% of short selling,” he said. “In order to resume short selling, the financial authorities will have to publish statistics on the profits of short selling agents.”
Meanwhile, the Financial Services Commission has repeatedly announced that the temporary ban on short selling will end on March 15 as scheduled.
As the KOSPI exceeded the 3,000 line and market expectations for an extension of the short selling ban swelled, it seems that it has hurried to formalize the reopening policy.
It seems that there is little need to extend the ban on short selling amid the KOSPI’s bull market.
The fact that short selling has a net function of’appropriate price formation’ and that it is a system commonly used in advanced capital markets is also subject to consideration.
With the aim of resuming short selling in March, the Financial Services Commission is revising the system in the direction of strengthening punishment for illegal short selling, improving the market maker system, and improving personal accessibility for short selling.
However, criticism is pouring out that the short-selling system is forced to resume even though many illegal activities are not eradicated.
Individual investors and some of the passports are voicing that the first priority is to prepare a system to eradicate illegal short selling.
The Financial Services Commission announced in 2018 that it would develop a’real-time stock balance and purchase quantity monitoring system’, but recently concluded that this is a practically impossible solution.
Recently, the Korea Exchange also announced that as a result of special supervision on whether market makers (securities companies) comply with short selling regulations from January 2017 to June 2020, suspected cases of non-borrowing short selling and violation of the uptick rule were found.
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