[Initial Moment] Short Selling Is Also a 'Market'

[Asia Economy Reporter Lim Jeong-su] The controversy over the resumption of short selling is heating up the political sphere. As financial authorities plan to lift the temporary ban on short selling scheduled for March, a fierce debate between the ruling and opposition parties is emerging.

As opposition lawmakers support the resumption of short selling, ruling party members have praised individual investors as 'Donghak Ants' or 'Patriots,' strengthening calls to extend the short selling ban. Yang Hyang-ja, a Supreme Council member of the Democratic Party, stated on Facebook, "Donghak Ants are not speculators who engaged in 'blind investment' in the past. Denying the smart investments of the people and labeling them as speculators is an expression of superiority and condescending thinking. It insults and belittles the Donghak Ants." Democratic Party lawmaker Park Yong-jin wrote, "Resuming short selling without correcting unfairness and institutional deficiencies is an abandonment of responsibility by financial authorities," and urged caution in pushing forward with the resumption amid institutional loopholes.

In response to the ruling party lawmakers' backlash, financial authorities showed a wavering stance. After sending text messages to reporters about the position on resuming short selling, a senior official from the Financial Services Commission ambiguously stated, "No decision has been made on resuming short selling," amid growing controversy centered on the political sphere. As the debate intensified, Yoon Kwan-seok, chairman of the National Assembly's Political Affairs Committee, said, "I think it is inappropriate for the political sphere to take the lead in saying whether to lift or extend the short selling ban," and added, "We will discuss with authorities and institutional improvement plans, and coordinate detailed matters through party-government consultations as needed."

Short selling is an investment method where investors borrow stocks they do not own, sell them in the market, and then repurchase the stocks after a certain period to return them. Investors expecting a stock price decline can profit by selling borrowed stocks at a high price and buying them back at a lower price. From the perspective of investors buying stocks, the resumption of short selling is hardly welcome as it can increase the volume of stocks sold.

However, short selling is a system adopted in most stock markets worldwide to utilize its positive function known as the 'price discovery function.' The price discovery function works properly when liquidity is abundant on both the buying and selling sides. It is also used as a tool to hedge temporarily against price declines while holding stocks for the long term. Since it is difficult to find means to hedge individual stocks in the stock market, the presence or absence of a short selling system often serves as a criterion for foreign investors to determine whether a stock market is advanced or not.

It is generally customary to maintain the short selling system when the market operates normally. The ban on short selling is a temporary measure used to stabilize the market when stock sell-offs are feared due to events like the 'Lehman crisis' or the 'COVID-19 pandemic.' If the short selling ban is an 'abnormal measure' used in special situations, the resumption of short selling signifies a return to 'normalcy.' With the KOSPI index soaring above 3100 and 'debt investing' rampant, increasing potential risks in the stock market, is there any reason or justification to continue the temporary measure to prevent a stock price crash?

If there are unfair aspects in how short selling operates in the market, it seems more desirable to focus on securing the fairness of the system rather than engaging in a fruitless debate over whether to resume short selling or not. Short selling is also a 'market.'