[Initial Insight] Short Selling, Trust Issues Must Be Resolved First

[Asia Economy Reporter Junho Hwang] Recently, the stock price trends of top market capitalization stocks have been unusual. The stock prices of large blue-chip stocks, which were purchased like savings over several years, are falling like autumn leaves. Although this is attributed to stock price movements due to external economic conditions such as inflation, as the stock prices of companies worth tens of trillions of won drop day by day, some voices are raising complaints about the tilted playing field.

The main grievance is about short selling. Short selling refers to borrowing stocks to sell them and then buying them back at a lower price to repay the loan. It is an investment method that profits during stock price declines, and 70-80% of short selling transactions are conducted by foreign investors. Accordingly, among retail investors, there is a claim that foreigners are driving stock prices down with massive funds, causing greater harm to individuals. They also argue that banning short selling altogether would prevent such situations.

Although somewhat extreme, there is some understanding when examining their points. Recently, short selling has been concentrated in the top market capitalization stocks leading the domestic stock market. It is not occurring in speculative stocks with short-term bubbles but rather in stocks where individuals have made long-term investments. According to Song Jae-ho, a member of the National Assembly’s Political Affairs Committee from the Democratic Party of Korea, from May, when short selling resumed, to September 17, about four months, the stock most short sold by foreigners was Samsung Electronics, with a short selling volume reaching 39.336 trillion won. This was followed by SK Hynix (13.469 trillion won), Kakao (10.604 trillion won), and LG Chem (10.178 trillion won). The stock prices of these companies also fell. During the same period, Samsung Electronics dropped 5.3%, SK Hynix 16.4%, and LG Chem 24.8%. Nevertheless, the Financial Services Commission analyzed that "no significant relationship was found between the short selling ratio and stock price fluctuations based on the overall market."

However, from September 17 to October 19, about a month, the stock prices of these companies have slid further. In particular, Samsung Electronics experienced stock price declines on days with heavy short selling: October 1 (short selling volume 63.3 billion won, stock return -1.21%), October 5 (104 billion won, -1.37%), October 12 (66.1 billion won, -3.50%), and October 13 (53.2 billion won, -0.29%). Despite recording the highest quarterly sales ever (73 trillion won) and the second-highest quarterly operating profit (15.8 trillion won) on October 8, the stock price remained in the 60,000 won range per share for three days starting that day. Some point out that foreign securities firms have consecutively issued pessimistic reports on Samsung Electronics and are profiting from short selling afterward.

The government has introduced measures to increase individual participation in short selling to alleviate such dissatisfaction. Starting next month, the stock lending period will be extended to 90 days or more, with extensions possible. However, since short selling is essentially a form of leveraged investment, is increasing the individual share truly the right path? When short selling resumed in May, policies were introduced to correct the tilted playing field between individuals and foreigners, but the individual short selling ratio has yet to exceed 2%.

Fundamentally, distrust of short selling must be alleviated. In the era of ‘one person, one account,’ presidential candidates are also calling for the abolition of short selling. While it is necessary to avoid populism-driven policies, if complaints about short selling arise every time stock prices fall, the government should either properly address retail investors’ misunderstandings or implement policies that reflect reality. It is a time when sharp scrutiny of foreign short selling and wisdom to persuade retail investors are needed.