S. Korea considers extending ban on stock short-selling

14-Aug-2020 Intellasia | KoreaTimes | 6:02 AM Print This Post

An extension of the temporary short-selling ban on the Seoul bourse has become more likely as the government appears to be lukewarm about allowing the resumption of the investment method scheduled for September 16.

Sources said the financial regulators are considering extending the ban for a few more months, taking into account growing calls from the public for the complete abolition of the method.

Theoretically, short-selling is a bet that the price of a stock will fall, and is considered a risky but quite lucrative trading strategy mostly applied by hedge funds.

Short-sellers commonly borrow shares and immediately sell them, betting the price will fall before they buy back the shares and return them to the lender, taking the price difference, or margin, as profit. When the global financial market was hit hard by the financial crisis back in 2008, regulators globally made similar moves to ban short-selling mostly due to fears the trading practice would exacerbate the sharp drop in stock prices.

A Realmeter survey of 1,000 adults nationwide showed Thursday that 63.6 percent of respondents think short-selling should be abolished or the government should extend the ban. Those who said short-selling damages retail investors reached 71.5 percent.

Opponents of short-selling also argued in a public hearing the same day that banning short-selling greatly degrades market liquidity and price information while increasing trading costs and volatility. They also said the investment method causes inequality between retail and institutional investors.

Proponents of short-selling emphasize that it prevents the market from getting overheated.

Korea imposed a six-month ban on short-selling of all listed stocks, March 16, after the market exhibited volatility in the aftermath of the COVID-19 pandemic. On a related note, the European financial authorities temporarily curbed short-selling because of the pandemic’s effect on their markets despite concerns that the restriction would undermine investments.

The Financial Services Commission (FSC) said nothing has been decided yet regarding the extension of the measure; however, papers written by Seoul National University professors at the request of the Korea Exchange reportedly proposed three possible scenarios ? an extension for three more months, an extension for six more months and lifting the ban on short-selling except for large caps and overheated stocks.

The FSC said it will take the papers and a public hearing into account when making a final decision. President Moon Jae-in recently ordered government officials to encourage retail investors to invest more in stocks, so the financial regulator is expected to extend the short-selling ban for their benefit.

FSC Chair Eun Sung-soo has already hinted at the extension, saying at the National Assembly late last month: “We will take into consideration the ongoing COVID-19 pandemic.”

But there exists concern that the extension could hamper foreign investment in Korean markets.

“If the government extends the short-selling ban, foreign investors may avoid investing in Korean stock markets, due to the impossibility of hedging,” Daishin Securities analyst Lee Kyung-min said. A short-selling bank requires hedge funds to submit their short-selling positions.

Some observers forecast Korea may adopt “Hong Kong-style” short-selling rules, even if the government lifts its ban. In Hong Kong, stocks are only eligible to be sold short if their daily turnover exceeds 60 percent of the company’s market capitalisation, which must also exceed 3 billion Hong Kong dollars ($387 million).

Although the FSC said this idea goes against “global standards,” Financial Supervisory Service Governor Yoon Suk-heun and the National Assembly Research Service suggested the government should consider adopting such rules.



Category: Korea

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