Photographer: SeongJoon Cho / Bloomberg
Photographer: SeongJoon Cho / Bloomberg
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Retail investors determined to see stocks rise came to life miserable for short sellers around the world.
In South Korea, the government is also moving forward.
Lawmakers overseeing the country’s $ 2 trillion stock market are discussing plans to extend one of the world’s biggest bans on short selling amid pressure from small bettors who direct more than two-thirds of daily trading.
Calls to make the 10-month ban permanent are increasing. More than 202,000 people signed a petition pleading with President Moon Jae-in to make short selling illegal – crossing a limit of 200,000 that forces him to provide an official response. Moon’s prime minister has already called the practice “undesirable”.
While much of the financial world has seen every turn in the struggle between retail investors and short sellers GameStop Corp., South Korea has quietly become a major battleground in the intermittent debate about the role of bearish trades in the stock markets.
Retail Frenzy
With the increasing day trading pandemic, individual investors have overtaken institutions and foreigners in the Korean stock market
Source: according to Koscom Corp., which provides financial data for the Korea Exchange
With national elections scheduled early next year, lawmakers 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 investor advocacy group called short selling “evil” and organized a protest against the practice outside government buildings. Meanwhile, the International Monetary Fund has urged South Korea to end its short selling ban, saying there is a risk of making the market less efficient and more difficult to hedge.
“Once the financial conditions in Korea and the functioning of the market after the Covid outbreak stabilized, we believe that there are conditions to reestablish this short selling practice,” Andreas Bauer, an employee of the fund, said at a virtual press conference. on the Korean economy on Thursday.
Like other countries, South Korea saw its stock market plummet in March as the pandemic intensified. Stock prices then hit rock bottom three days after the ban on short selling came into effect, aided by a flood of central bank liquidity and retail purchases. The country’s benchmark Kospi index ended 2020 with a gain of 31%, the best global performance after the Nigeria stock indicator. Kospi has risen 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, apart from Indonesia, to maintain the restriction.
A research article widely covered by the local media helped fuel popular rage against short sellers. Authored by professors at Hanyang University in Seoul, it showed that short sellers in Korea – most of them foreign investors – collectively made an average profit of $ 2 million a day from 2016 to 2019. Investors who traded at the margin, the largest some of whom were retail gamblers, lost an average of $ 900,000 a day.
“Short sellers are the Axis of Evil in Korea,” said Jung Eui-jung, chief executive of the Korea Stockholders Alliance, evoking the phrase famous by the President of the United States, George W. Bush. Jung’s organization is lobbying the South Korean government to permanently ban short selling if it cannot find a way to make the practice “fair” for retail investors.
It is not clear whether policymakers would go this far. Previous market-wide prohibitions against short selling during the 2008 global financial crisis and the 2011 European debt crisis lasted only a few months at a time, although restrictions on bank shares have remained in place for several years.
In 2016, a ruling party legislator tried to ban short selling of shares on the Kosdaq startup index, but failed. And in 2018, after Goldman Sachs Group Inc. was fined 7.5 billion won ($ 6.7 million) for so-called short selling, investors rushed to support petitions calling for a ban on short selling, but the number of signatures never reached current levels.
For now, lawmakers are discussing a plan to maintain the ban on until June. They are also working on legislation that will toughen short selling penalties – in which investors place a bearish bet without first borrowing stocks – and further harmonize short selling rules for institutional and retail investors.
“Some Koreans do not understand the short selling mechanism and do not agree with the practice of selling something that she or he does not have,” said Lee Hyo-Seob, a researcher at the Korea Capital Markets Institute. “It doesn’t help that the fines levied on institutional investors who operate inside information or manipulate the stock markets through short selling are so weak.”
(Updates the number of people who signed a petition in the third paragraph)