['Hot Potato' Short Selling] ② Short Selling Trading Volume Does Not Proportionally Relate to Stock Price Decline

Short Selling Trading Volume High but Stock Prices Do Not Drop Sharply
When Short Selling Concentrates on Stocks with Negative News, Decline Tends to Worsen

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 for 350 large-cap stocks included in the KOSPI200 and KOSDAQ150 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 opinion 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 flare up at any time. Meanwhile, last year’s short selling transaction volume reached an all-time high, and the first quarter of this year was also significant, increasing dissatisfaction and distrust among individual investors.

Individual investors generally believe that short selling drives stock prices down. However, an analysis of stocks with high short selling transaction volumes and their price trends in last year and the first quarter of this year showed results contrary to this perception. A large short selling transaction volume does not necessarily lead to a sharp decline in stock prices. However, when negative news occurs amid high short selling transaction volumes, the price drop tends to be more severe.

According to data received from the office of Yoon Young-duk, a member of the National Assembly’s Political Affairs Committee from the Democratic Party of Korea, the stocks with the highest total short selling transaction volumes by individuals, institutions, and foreigners last year were Samsung Electronics (6.6057 trillion KRW), LG Energy Solution (5.7689 trillion KRW), SK Hynix (3.7555 trillion KRW), EcoPro BM (3.5791 trillion KRW), and LG Chem (3.2275 trillion KRW), in that order.

However, the size of the total short selling transaction volume did not necessarily correspond with the extent of stock price decline. As of the end of last year, Samsung Electronics traded at 55,300 KRW, down 29.64% from the beginning of the year. LG Energy Solution, ranked second in total short selling transaction volume, fell 13.76% during the same period. SK Hynix, which dropped the most at 41.63%, ranked third in short selling transaction volume. EcoPro BM declined 22.34% last year, while LG Chem, with a similar short selling transaction volume to EcoPro BM, only fell 2.91% over the year.

However, when negative news caused stock prices to fall, a high short selling transaction volume tended to amplify the decline. Last year, Samsung Electronics and SK Hynix’s earnings were hit hard by the "semiconductor winter." Both companies recorded earnings shocks. In particular, SK Hynix posted an operating loss of 1.7012 trillion KRW in the fourth quarter, marking its first deficit in 10 years since Q3 2012. Samsung Electronics’ operating profit in Q4 was 4.3061 trillion KRW, down 68.95% from the same period the previous year. Although there were expectations of a rebound in earnings amid semiconductor bottoming theories, and stock prices rose at times, the annual price trend showed a steeper decline compared to other top short selling transaction volume stocks.

Furthermore, an analysis of short selling transaction volumes and returns in the first quarter of this year found that a large short selling transaction volume does not necessarily limit stock price gains. This indicates that even with high short selling transaction volumes, stock prices can rise or surge sharply. It also suggests that short selling does not primarily drive stock price declines but rather accelerates the downtrend when negative news occurs.

In the first quarter, EcoPro BM recorded the highest short selling transaction volume of 2.3725 trillion KRW, combining both the KOSPI and KOSDAQ markets. Despite having the largest short selling transaction volume, EcoPro BM’s stock price soared 139.83% during the quarter, thanks to explosive interest in secondary battery stocks. Compared to Samsung Electronics, which had the highest short selling transaction volume last year and recorded 1.6667 trillion KRW in Q1 with an 11.45% price decline, EcoPro BM’s short selling volume was much higher, yet its stock price rose vertically.

Similarly, LG Energy Solution and POSCO Future M, also secondary battery stocks, recorded short selling transaction volumes of 1.4038 trillion KRW and 1.0124 trillion KRW, ranking second and fifth respectively. However, their stock prices surged 30.94% and 42.30% during the first quarter.

Although Samsung Electronics and SK Hynix, the top market capitalization stocks in KOSPI and leading semiconductor companies, ranked high in short selling transaction volumes, their stock prices rose. This is interpreted as investors’ interest being drawn by expectations that Q1 earnings had bottomed out and would improve going forward. Samsung Electronics recorded the third highest short selling transaction volume of 1.3744 trillion KRW in Q1 but saw a 15.32% increase in stock price during the same period. SK Hynix also rose 17.04% despite the fourth highest short selling transaction volume of 1.105 trillion KRW.

Professor Kim Dae-jong of the Department of Business Administration at Sejong University explained, "When a stock price decline is expected, short selling increases, but the more negative news there is, the more the stock price falls, which in turn increases short selling. The increase in short selling means many people expect the stock price to fall, and it can also tend to amplify downward pressure."