Financial Services Commission, "Smooth Settlement of Short Selling"... 720 Suspicious Naked Short Selling Transactions Under Review (Comprehensive)

[Asia Economy Reporter Ji Yeon-jin] Since the partial resumption of short selling on the 3rd of last month, financial authorities have been conducting audits on 720 suspected cases of naked short selling.

The Financial Services Commission (FSC) announced on the 3rd that it has established a surveillance system with the Korea Exchange (KRX) to strengthen the detection of short selling violations and is closely monitoring the market.

The KRX selected about 300 cases for inspection through an analysis of trading patterns to conduct in-depth checks on illegal short selling and uptick rule violations. If any legal violations are found after the audit, the exchange plans to notify the Capital Market Investigation Team of the FSC and the Financial Supervisory Service (FSS).

Additionally, audits are being conducted on about 120 cases with insufficient settlement quantities, which may indicate naked short selling, and 600 suspected "sell first, buy later" transactions. Insufficient settlement quantities occur when accounts lack the shares on the settlement date (two days after the trade) and short sell without borrowing shares, or when foreign investors fail to submit settlement instructions to custodians. "Sell first, buy later" refers to transactions where shares not owned are sold first and then the same quantity is bought on the same day for settlement, indicating possible naked short selling.

The FSC stated, "The government is sequentially inspecting whether securities firms have smoothly established and are operating systems to block and detect illegal short selling, and will continue to operate the stock market transparently and fairly through in-depth inspections of suspicious trades by the Market Surveillance Committee."

They also urged short selling investors to exercise special caution as the list of shortable stocks will change due to the reconstitution of the KOSPI 200 and KOSDAQ 150 components starting from the 11th of this month. Currently, 8 stocks in the KOSPI 200 and 16 stocks in the KOSDAQ 150 will be changed in terms of short selling eligibility.

Meanwhile, the FSC evaluated that "the resumption of short selling appears to have been smoothly settled under favorable macroeconomic and stock market conditions such as the economic recovery trend."

According to the FSC, the KOSPI index closed 2.4% higher on the previous day compared to April 30, the last trading day before the resumption of short selling, while the KOSDAQ fell only 0.2%. Although global stock markets showed mixed trends last month due to the possibility of the Federal Reserve (Fed) tapering quantitative easing amid U.S. inflation, the domestic market remained relatively stable due to improved corporate earnings and buying by individual investors.

Foreign investors sold a net 9 trillion won in the domestic market last month, but similar selling trends were observed in other Asian countries due to reduced Asian exposure amid concerns over U.S. monetary tightening. The analysis also pointed out that the rapid outflow of foreign funds was accelerated by the depreciation of the Korean won starting from mid-last month.

The FSC reported that the average daily short selling transaction amount over the past month was 688.2 billion won, which increased compared to the past, but considering that the total transaction amount more than doubled, the increase is not significant.

Short selling transaction amounts initially surged due to accumulated demand during the ban period but have gradually stabilized downward. The proportion of short selling to total transaction volume was 2.7%, about 40% lower than before.

The FSC explained, "No significant relationship was found between short selling and stock prices during the analysis period," adding, "Examining the top 10 stocks with the highest short selling transaction amounts and ratios shows no consistent pattern."

Over the past month, the average daily short selling transaction amount by foreign investors was 582.7 billion won (478.9 billion won in KOSPI, 103.8 billion won in KOSDAQ), accounting for 84.7% of total short selling volume, while institutions recorded 94.2 billion won (76.6 billion won in KOSPI, 17.6 billion won in KOSDAQ), a 67% decrease compared to the period just before the short selling ban (average daily 286 billion won from January to March last year).

The average daily short selling transaction amount by individual investors using the new personal lending system was 11.3 billion won (8.7 billion won in KOSPI, 2.6 billion won in KOSDAQ), an increase of about 45% compared to before. However, the average utilization rate of the lending volume in the personal lending system (executed amount/allocated amount) was 0.4%, and the proportion of same-day lending and repayment was about 39%.