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THE INVESTOR
July 13, 2020
Big Reunion

Finance

Watchdogs mull regulated short selling system

  • PUBLISHED :March 02, 2020 - 16:52
  • UPDATED :March 02, 2020 - 16:52
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Korea’s financial watchdogs are considering regulating short sales of local stocks, similar to rules being implemented in Hong Kong, to reinforce market vulnerability exposed over massive amounts of equities dumped by foreign investors in the wake of the COVID-19 outbreak. Yet authorities have conflicting opinions on the subject, officials said Monday.

The Financial Supervisory Service has reviewed allowing investors to short sell only locally listed stocks with a certain market capitalization. The scheme would be similar to what has been introduced by the Stock Exchange of Hong Kong to specify designated securities eligible for short selling. 



Short selling is an investment strategy that speculates on the decline in price of stocks or other securities. When stock prices dip, investors buy the equities at cheaper prices to make considerable profits. The Hong Kong government allows stocks to be sold short only if their market cap exceeds 3 billion Hong Kong dollars ($385 million) and their daily turnover surpasses 60 percent of the whole market cap. It is currently the only market that imposes such restrictions on short sales.

FSS Gov. Yoon Suk-heun has raised his voice on the regulations, describing the domestic market as an “uneven playing field” where foreign investors have benefited the most while individual investors have suffered from plummeting shares.

The trading value from short sales marked 103.5 trillion won ($86.4 billion) last year. Among the figure, foreign investors’ trading accounted for 65 trillion won, or 62.8 percent. While institutional and individual investors marked 37.3 trillion won and 1.1 trillion won, or 36.1 percent and 1.1 percent, respectively, according to data compiled by the Korea Exchange.

Amid the prolonged COVID-19 outbreak, individual investors’ investment losses have increased rapidly, since their trading volume in small-cap stocks in the benchmark Kospi and tech-heavy Kosdaq accounts for over 90 percent.

Regarding the data, the FSS is positive about constraining short sales on larger-cap stocks, which may bring a larger ripple effect, as in the stock market in Hong Kong.

“We’re currently reviewing short selling regulations, along with which stocks to be included, depending on their size of market cap. To make the deal, we need to negotiate with the FSC on the specific amount of the market value,” an official of the FSS said.

FSC Chairman Eun Sung-soo had previously been quoted as “positively considering” the restrictions. The financial regulator, however, is concerned about a potential fall in local market’s liquidity and efficiency, on the possibility of foreign investors’ offloading of funds.

“Short selling strategy can be good functionally to raise liquidity and prices of stocks in a sluggish market,” an official of the FSC said, maintaining a cautious tone. “We haven’t yet decided upon adopting the regulations. Before the decision-making, we need to consider that the Korea market has more regulations on its market than other countries. Further, (we’d better) think about foreign investors and credit ratings.”

By Jie Ye-eun/The Korea Herald (yeeun@heraldcorp.com)

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