[Exclusive] Last Year’s Short Selling Hits Record High of 143 Trillion Won... Already Surpasses 50 Trillion This Year

['Hot Potato' Short Selling] ① Playground Exclusively for Foreigners... Foreigners' Share Exceeds 70%
Exclusive Access to Short Selling Data from Yoon Young-duk, Democratic Party Office

Editor's NoteThe Financial Services Commission temporarily banned short selling on all KOSPI and KOSDAQ stocks on March 16, 2020, to reduce stock price volatility caused by the COVID-19 crisis. As the market stabilized, in May 2021, short selling was allowed only on 350 large-cap stocks included in the KOSPI 200 and KOSDAQ 150 indices. After more than two years since the partial resumption, the Financial Services Commission has indicated its intention to fully resume short selling. The Financial Supervisory Service and Korea Exchange have also voiced a unified stance that a full resumption of short selling is necessary for the advancement of the capital market. Although authorities have stepped back somewhat due to strong opposition from individual investors, their determination to fully resume short selling remains strong, and the controversy is expected to intensify at any time. Meanwhile, last year’s short selling transaction value reached an all-time high, and the first quarter of this year has also been significant, further increasing dissatisfaction and distrust among individual investors.

Even though the second quarter has not yet fully passed, short selling transactions have already exceeded 50 trillion won. Following last year’s record-breaking transaction amount of 143 trillion won, this year is also expected to easily surpass 100 trillion won. Notably, foreigners still hold an overwhelming share in short selling transactions. Recently, Ra Deok-yeon, CEO of Hoan and a key figure in the Soci?t? G?n?rale (SG) Securities-related crash scandal, pointed to short selling forces as the cause of multiple stocks hitting the lower price limit. Financial authorities are also investigating the possibility of short selling forces being involved. The supervisory authorities have imposed their first fine on illegal short selling orders deliberately placed to drive down stock prices. With investor distrust of short selling deepening and the transaction value rapidly increasing, the debate over the full resumption of short selling is expected to become even more intense.

Short Selling Investment Strategies Surge During Index Declines

On the 15th, an analysis of the cumulative short selling transaction status of all KOSPI and KOSDAQ stocks, obtained from the Korea Exchange in cooperation with Rep. Yoon Young-duk of the National Assembly’s Political Affairs Committee and the Democratic Party of Korea, revealed that last year’s short selling transaction value reached a staggering 143.2893 trillion won. This is the largest scale ever recorded. This record was set during the period when only short selling on 350 large-cap stocks was allowed. As of April 25 this year, the amount has already reached 53.2565 trillion won. Accordingly, this year is likely not only to exceed 100 trillion won but also to break last year’s record.

The short selling transaction value was only 121.2 billion won in 2001. It surpassed 1 trillion won in 2003 and showed a steady upward trend. In 2007, it jumped to the 18 trillion won range. Continuing to increase, it reached 94.5843 trillion won in 2017. In 2018, it surpassed 100 trillion won, reaching 127.42 trillion won. In 2020, due to the short selling ban, it dropped to 35.9443 trillion won but increased again to 96.4986 trillion won in 2021 with the partial resumption.

The fact that last year, during the partial resumption of short selling, the highest record was set is noteworthy. Market experts interpret this as a result of active short selling during the index decline last year. Especially, except for the 350 large-cap stocks, only liquidity providers (LPs) and market makers (MMs) are allowed to short sell other stocks. Market makers had suspended operations from September 2021 to August last year in protest against fines imposed by the Financial Supervisory Service. It is unusual that such large-scale short selling occurred solely through liquidity provision, indicating that short selling is continuously taking place in the domestic market.

This year, the amount has already exceeded 50 trillion won. If short selling was used as an investment strategy during index declines, relentless short selling can be expected this year as well. The stock market is currently in a box range. Although securities firms have not yet announced their KOSPI forecast bands for the second half, almost no one expects it to surpass 2,800 points. The market is expected to remain in a box range throughout this year. Accordingly, short selling transaction values are likely to increase rapidly until the end of the year. However, a Korea Exchange official cautioned against overinterpretation, saying, "Although last year’s short selling transaction value was the highest ever in numerical terms, the proportion of short selling in the market’s total transaction value was not the highest and has decreased compared to before."

Foreigners Account for 70%... Individuals Only Around 2%

Individual investors oppose short selling because they believe it exacerbates index declines and causes undervaluation (Korea Discount). Short selling is an investment strategy where investors borrow stocks they do not own, sell them expecting the price to fall, and later repurchase them to earn a profit. The structure requires the stock price to decline to generate gains. It is difficult to separate the index sluggishness last year from short selling. Moreover, foreigners dominate short selling in the domestic market to such an extent that it can be said to be their exclusive domain.

Analysis of short selling transaction amounts and proportions by investor type shows foreigners overwhelmingly dominate. Last year, foreigners accounted for 71.85% of KOSPI short selling transactions and 59.39% in the KOSDAQ market. Institutions accounted for 26% and 37.23% in KOSPI and KOSDAQ, respectively. In contrast, individuals’ shares were meager: only 2.15% in KOSPI and 3.38% in KOSDAQ. The situation was similar in the first quarter of this year. Foreigners accounted for 68.83% in KOSPI and 57.38% in KOSDAQ. Institutions accounted for 29.44% and 39.80%, respectively. Individuals accounted for only 1.73% in KOSPI and 2.82% in KOSDAQ.

Collateral Ratios and Repayment Periods Must Be Improved Before Full Resumption of Short Selling

The Korea Stock Investors Association (KOSIA), a non-profit organization protecting stock investors’ rights with over 52,000 members, strongly urges the government to establish fundamental measures to correct the skewed short selling market before fully resuming short selling.

Short selling is divided into securities lending transactions used by foreigners and institutions, and margin transactions used by individuals. Securities lending transactions have a maximum lending period of one year, but the repayment period can vary by contract, effectively allowing indefinite extensions. In contrast, margin transactions have a maximum lending period of only three months (90 days). Foreigners and institutions can profit from short selling by waiting for negative news on the target stocks. Individuals, with shorter repayment periods, find it difficult to achieve higher returns than foreigners and institutions.

Regarding short selling repayment periods, foreigners and institutions have 120 days, while individuals have 90 days. However, foreigners and institutions can extend the period indefinitely by paying only the lending fee, whereas individuals cannot. The proposal is to unify all repayment periods to 120 days. KOSIA President Jung Eui-jung said, "We need to unify the periods and enforce forced repayment of short selling positions if the period is exceeded, and implement a mechanism that prohibits short selling of the relevant stock for one month after forced repayment." He also emphasized the need to unify collateral ratios. "Institutions and foreigners have a collateral ratio of 105%, but individual investors have 120%. This means individuals are more likely to face forced liquidation when a shorted stock plunges," he pointed out. Rep. Yoon Young-duk said, "It is necessary to improve the system so that individual investors are not disadvantaged compared to institutions and foreigners."

"Opposing Opinions on Short Selling Must Be Collected and Reflected"

Financial authorities and market experts argue that, considering South Korea’s economic scale and capital market development direction, it is not in line with international standards for Korea alone to ban (or partially resume) short selling. They emphasize that full resumption of short selling is a prerequisite for inclusion in the Morgan Stanley Capital International (MSCI) developed markets index and that focus should be placed on the positive functions of short selling. Inclusion in the MSCI developed markets index is expected to attract more foreign investment funds and enhance stock market stability.

They also argue that short selling has many positive functions. According to the Korea Institute of Finance’s report "Short Selling Debate and Future Policy Directions," the main positive functions of short selling include ▲ supplying market liquidity ▲ enhancing price discovery functions ▲ improving investors’ risk management convenience. Song Min-gyu, senior research fellow at the Korea Institute of Finance, explained, "Studies using domestic data generally show that short selling improves market liquidity and the efficiency of price discovery. Analyzing the effects of short selling bans during the 2008 global financial crisis, the 2011 European debt crisis, and the 2020 COVID-19 crisis shows that banning short selling actually increased stock price volatility."

In response, KOSIA President Jung Eui-jung said, "To end the long-standing debate over the pros and cons of short selling, it is necessary to investigate the profits from short selling accounts over the past decade." He emphasized, "While agreeing with the resumption of short selling, investor protection measures through reform-level institutional changes must be established first."

Experts believe that not only authorities but also the political sector should work together to find solutions. Hwang Se-woon, senior research fellow at the Korea Capital Market Institute, said, "Since the stock market is not booming, there is a high possibility of strong opposition if short selling is fully resumed, which is a burden. To fully resume short selling, authorities must collect opposing opinions and reflect them," he suggested.