Koreans blame short sellers for bear market

14-Oct-2021 Intellasia | Koreaherald | 5:53 AM Print This Post

South Korean day traders are expressing frustrations over the bearish domestic stock market in early October, out of the belief that short selling strategies by institutional investors are adding fuel to the market volatility.

On Wednesday, a public petition calling for a complete ban of short selling activities in Korea’s stock market has gained nearly 49,000 endorsements over the past week, in another major collective action unfolding on presidential office Cheong Wa Dae’s website.

The unnamed petitioner claimed that the “astronomical amount of short trades,” in particular by foreign investors, are putting a lid on the growth potential of listed companies in Korea, with concerns surrounding the companies being exaggerated to dwarf their rosy prospects and earnings surprises.

This comes as short selling trades stood at 63.6 trillion won ($53.2 billion) from May until Tuesday on Kospi and Kosdaq bourses combined, according to data by stock bourse operator, the Korea Exchange. Foreign investors carried out 3 out of 4 short trades by transaction value, the KRX data also showed.

A short selling refers to borrowing stocks and selling them, with the aim to eventually buy the same amount of stocks at a lower price when the stock price falls, before returning them to the lender.

The short seller takes profit from buying the stock at a price lower than the price it sold it for, largely based on its prediction of a bearish market.

Korea partially allowed covered short selling for large-cap stocks on May 3, following a 14-month temporary ban of such activities forcing short traders to borrow the shares before selling stocks in order to address widening volatility in the market due to the pandemic impact. Korea outlawed a naked short selling, which would otherwise have enabled a trader to sell the shares before borrowing them and having them at hand.

Since the reintroduction of the policy, Kospi, a benchmark index representing the Korea Exchange’s main bourse, fell 6.4 percent, while the Kosdaq, an index for the development bourse, slipped 3 percent.

The bearish trend grew sharper this month. Solely in October, Kospi tanked 4 percent. Short trades over the past six trading days in October rose in tandem, as 4.3 trillion won worth of stocks were shorted, accounting for nearly 7 percent of the total this year.

Market bellwether Samsung Electronics stock price dropped nearly 7 percent in October, with nearly 30 trillion won worth of its market cap evaporating within six trading days until the share price hit the annual low Tuesday. The bearish trend continued despite its earnings release that its quarterly revenue reached an all-time high of 73 trillion won.

Samsung Electronics was one of the most shorted stocks in October among over 2,300 listed companies Korean bourses. Over 80 billion won worth of short sales were recorded in the past six trading days until Tuesday.

The short selling trend will apparently linger in Korea. Short interests or borrowed shares that are not bought back by investors taking short positions rose over 90 percent to 12.2 trillion won on Korean stock market as of October 7, meaning investors are increasing their engagement with short selling.

Biotechnology company Celltrion, shipping firm HMM and panel maker LG Display were top three listed companies where investors were taking short positions as of October 7, with their combined worth of short interests exceeding 2 trillion won.

Meanwhile, the latest petition to the presidential office follows similar petitions that urges Korea to prohibit any short selling activities, with one gaining over 200,000 supporters in January. Petitioners have also called for a restriction on how long an institutional investor can keep its short position, with that of individuals being set at one year, so that the financial authorities can contribute to a level playing field.



Category: Korea

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