Photographer: SeongJoon Cho / Bloomberg
Photographer: SeongJoon Cho / Bloomberg
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Retail investors tend to watch stocks go up, made life miserable for short sellers around the world.
In South Korea, the government is also hoping.
Legislators overseeing the $ 2 billion dollar stock market discuss plans to extend one of the world’s longest bans on short selling, amid pressure from mom-and-pop players that exceed two-thirds of the daily trade.
Calls to make the ten-month ban permanent are on the rise. More than 202,000 people have signed a petition calling on President Moon Jae-in to make short sales illegal – exceeding the 200,000 threshold that forces him to make an official response. Moon’s prime minister has already call the practice ‘undesirable’.
While a large part of the financial world sees every turn in the battle between retail investors and short sellers GameStop Corp., South Korea, has quietly become a major battleground in the ongoing debate over the role of bearish trading in stock markets.
Retail Frenzy
With the increasing day trading, individual investors have overtaken institutions and foreigners in the Korean stock market
Source: according to Koscom Corp., which provides financial data from Korea Exchange
As national elections are set to take place early next year, policymakers in Seoul are reluctant to anger thousands of Koreans who fell in love with stock trading during the pandemic. The head of a Korean retail investment group called short sales ‘evil’ and a protest against the practice outside government buildings. Meanwhile, the International Monetary Fund has urged South Korea to end its short-selling ban, saying it runs the risk of making the market less efficient and more difficult to hedge.
“As financial conditions in Korea and the functioning of the market after the outbreak of Covid have now stabilized, we believe that there are conditions to start reintroducing this use of short selling,” said Andreas Bauer, an official at the fund, said virtual press conference on the Korean economy Thursday.
Like other countries, South Korea dropped its stock market in March when the pandemic intensified. The share prices were then helped, three days after the short-selling ban took effect, helped by a flood of central bank liquidity and retail purchases. The country’s benchmark Kospi index ended 2020 with a 31% increase, the best performance worldwide after Nigeria’s stock market. The Kospi has climbed another 6.8% so far this year.
While other markets, including France and Italy, also imposed short-selling bans at the same time, South Korea is now the only country other than Indonesia that has complied with the restriction.
One research article that is extensively covered by local media has helped fuel popular anger towards short sellers. The author was shown by professors at Hanyang University in Seoul that short-sellers in Korea – mostly foreign investors – collectively earned an average of $ 2 million profit per day from 2016 to 2019. Investors who traded on margin, most of whom traded were retailers , lost an average of $ 900,000 a day.
“Short sellers are Korea’s Axis of Evil,” said Jung Eui-jung, chief executive of the Korean Shareholders’ Alliance. famous by US President George W. Bush. Jung’s organization is campaigning for the South Korean government to ban short selling permanently if it can not find a way to make the practice ‘fair’ for retail investors.
It is unclear whether policymakers would ever go that far. Previous market-wide bans on short selling during the global financial crisis in 2008 and the European debt crisis in 2011 lasted only a few months at a time, although restrictions on bank shares were still in place for several years.
In 2016, a ruling party lawmaker tried to ban short selling for shares in the early Kosdaq index, but failed. And in 2018, after Goldman Sachs Group Inc. won a $ 7.5 billion fine ($ 6.7 million) for so-called naked short sales, urging investors to return petitions banning short sales, but the number of signatures never reached today’s levels.
For the time being, legislators are discussing a plan to keep the ban inside place until June. They are also working on legislation that will intensify penalties against naked short selling, in which investors make a clumsy bet without first borrowing shares, and to bring more short-selling rules for retail and institutional investors into line.
“Some Koreans do not understand the mechanism of short selling and do not agree with the practice of selling something he or she does not own,” said Lee Hyo-Seob, a research fellow at the Korea Capital Market Institute. “It does not help that the fines levied on institutional investors who manipulate insider trading or stock markets through short selling are so weak.”
(Update the number of people who signed a petition in the third paragraph)