April 17, 2024

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Financial Services Commission (Yonhap)

The nation’s top financial regulator said on April 19 it will launch a new stock loan system for retail investors to have better access to stock borrowing for short selling.

Short selling is a trading technique where investors sell borrowed stocks on the belief that share prices will fall in the near future. Short sellers profit if they buy the stocks back for less than they sold them for.

Under the new system, a total of 17 local brokerages, including Korea Investment & Securities, NH Investment & Securities, Samsung Securities and KB Securities, will begin to lend Kospi 200 and Kosdaq 150 shares up to 2.4 trillion won ($2.1 billion) starting May 3, the Financial Services Commission said in a statement.

An additional 11 securities firms, including KTB Investment & Securities, Hanwha Investment & Securities and IBK Securities, will operate the stock lending services by the end of this year.

The latest move came after the FSC decided to allow short sales to resume from May 3, which will be limited to stocks on the Kospi 200 and Kosdaq 150 indexes, aimed at expanding retail investors’ participation in the short selling market, largely dominated by institutional and foreign investors, who have greater access to the capital and information they need to profit from short selling.

Retail investors have long voiced criticism over the lack of stocks available for short selling in the market. As of February last year, merely six local brokerages -- NH Investment & Securities, Kiwoom Securities, Shinhan Investment Corp., Daishin Securities, SK Securities, and Yuanta Securities Korea -- have been operating stock lending for individuals, which amounted to some 20 billion won in total, data showed.

Meanwhile, the FSC will obligate day traders to complete online education courses and mock investment trials, offered by the Korea Institute of Financial Investment, before they borrow stocks for short selling.

Also, there will be short-selling limits, depending on their investment experiences, to prevent excessive losses.

Beginners can make short sales up to 30 million won, while intermediate-level investors, who have used the trading tactic more than five times with a total amount of stock borrowing amounting to 50 million won or more, are subject to a cap of 70 million won. Professional investors with more than two years of short-selling experience are to be excluded from the envisioned investment limit.

By Choi Jae-hee (cjh@heraldcorp.com)