[What Do You Think] The Only Solution Is the Abolition of the Unfair Symbol 'K Gongmaedo'

[濁流淸論(Takryu Cheongron)] Why I Oppose the Resumption of Stock Short Selling

Takryucheongron is a column featuring in-depth analysis and diagnosis by experts in the relevant fields on socially contentious topics. This week's topic is short selling in the stock market, which is drawing both support and opposition ahead of its scheduled resumption in March.

Short selling is a hot issue these days. Without short selling, the domestic market could have enjoyed the 2 to 6 times index growth that major countries have experienced over the past decade. Short selling should be abolished for the following six reasons, but since it cannot be immediately banned, let us prohibit it for one year and reach a conclusion through social discussion.

First, capital outflow. Our stock market has the dishonorable nickname of “foreigners’ automatic cash withdrawal machine.” Foreigners occupy about 70% of short selling, and since the stock market opened 27 years ago, foreigners have earned 36 times the KOSPI’s growth rate in profits. Recently, they have been pocketing over 100 trillion won annually. It goes without saying that short selling profits have contributed to this. Moreover, short selling profits are not taxed.

Second, short selling is the nemesis of individual investors. “You lose money if you invest in stocks.” This is a long-standing saying. Among several reasons, short selling is a representative one. Over 13 years since 2007, during the box market (KOSPI + box range), short selling sucked individual investors’ funds like a vacuum cleaner. In the endless cycle of pushing prices down through short selling just when they were about to rise, only a very small number of individuals survived. Fighting barehanded against those armed with advanced weapons, what remained were empty wallets, family conflicts, and extreme choices.

Third, the symbol of unfairness, “K-Short Selling.” South Korea grants too many privileges to short selling. There is no mandatory repayment period or margin requirement. Leverage of up to 20 times is possible. Market makers’ short selling is tax-free and considered a “divine hand,” and there are suspicions that naked short selling is commonplace.

Fourth, stock market disasters are grounds for abolishing short selling. On the first day of the short selling ban last March, market makers’ short selling amounted to 440.8 billion won, showing the dark nature of short selling. The KOSPI plunged to the 1400 level, a devastating regression to 11 years ago, causing many individual investors to suffer economic homicide. Meanwhile, short selling forces amassed enormous wealth. A special prosecutor is definitely needed.

Fifth, the flower path created by the short selling ban. The Financial Services Commission must present more than six major problems that occurred during the nine months after the short selling ban to justify its resumption. Did tax revenue decrease? It increased by more than 4 trillion won. Did the index fall? The KOSPI broke through 3000 for the first time ever. Did foreign capital outflow? Except for the early stage of COVID-19, it actually flowed in. Was there overheating or a bubble? Except for Samsung Electronics and a few others, about one-third of the 198 out of 200 KOSPI stocks declined over the past three months. The talk of overvaluation is an optical illusion caused by the temporary surge of large-cap stocks. If one had bought all stocks at the 2700 index level in December last year, the return as of January 13 was only 3.9%.

Sixth, the 39-fold profit from short selling is a perfect reason for abolition. On the 17th, Dr. Eun-A Lim of Hanyang University and Professor Sang-Kyung Jeon’s team from the Business School revealed in a paper that the profit from short selling compared to individuals is 39 times. The winning rate is an astonishing 97.5%. This is almost impossible in the real world, yet it is true, which is very sad. How many citizens must have been sacrificed? I believe Korea’s short selling is a system that exploits individual investors under the guise of clever logic (positive functions), like old communism. Immediate abolition is the answer, but let us prohibit it for one year and find the right answer through social discussion.

Jeong Eui-jeong, Representative of the Korea Stock Investors Association