[Exclusive] 'Gaemi Suspicion' Confirmed... Illegal Naked Short Selling During Ban Period Verified

Four Foreign Securities Firms and Foreign Pension Funds
Detected Naked Short Selling During COVID-19 Crash Ban Period
Individual Investors Suspect "Illegal Short Selling by Market Makers During Ban"

[Asia Economy Reporter Ji Yeon-jin] It has been confirmed that foreign securities firms engaged in naked short selling even during the period when short selling was completely banned following the COVID-19 market crash in March 2020. Despite the ban on short selling to address financial market instability caused by the COVID-19 crisis, market makers continued to conduct short selling transactions, which sparked distrust of short selling among individual investors. In fact, illegal naked short selling occurred.

According to the Financial Services Commission on the 2nd, at the February 9 meeting this year where the Securities and Futures Commission imposed a fine of 1 billion KRW on Korea Investment & Securities for violating short selling regulations, sanctions were also imposed on six foreign securities firms and three domestic securities firms for short selling violations. ▶Related article on page 4

In particular, four foreign securities firms were fined between 30 million KRW and 54 million KRW for naked short selling detected from late March to mid-August 2020, during the period when short selling was banned. The Financial Services Commission had completely banned short selling from March 16, 2020, when the stock market plunged due to COVID-19, until the end of April last year. Currently, short selling is partially allowed only for KOSPI 200 and KOSDAQ 150 stocks.

Short selling is an investment method where stocks are borrowed and sold, then repurchased later to return the shares, typically done with the expectation of a price decline. Short selling regulations mainly include the prohibition of naked short selling (selling without borrowing stocks), the obligation to display short selling orders, and the uptick rule. Among these, the prohibition of naked short selling to prevent settlement failures is the core regulation. According to the status of illegal short selling stocks obtained by the Citizens’ Coalition for Economic Justice (CCEJ) through an information disclosure lawsuit against the Financial Services Commission, naked short selling occurred on 48 stocks from October 25, 2017, to September 25, 2019.

The recent sanctions relate to illegal short selling transactions that occurred afterward, confirming the illegal short selling by market makers during the short selling ban period that individual investors had long suspected. It also demonstrates that naked short selling is difficult to prevent in advance. Jeong Ui-jeong, head of the Korea Stock Investors Association, said, "Individual investors have long believed that naked short selling has been very active in the Korean stock market," adding, "If the authorities have the will, a real-time short selling detection system is possible, but the government only comes up with after-the-fact measures."

Naked short selling of 26 billion KRW with fines of 1 billion KRW

Analyzing the agenda of the Securities and Futures Commission on February 9 this year, foreign securities firm C was fined 30 million KRW for naked short selling 48 shares of Huons Global and 57 shares of Inox Advanced Materials on March 31, 2020, without borrowing the stocks. On the day of these short selling transactions, the prices of both stocks fell during the trading session but closed higher.

Foreign securities firm D engaged in naked short selling of 4,862 shares of Hugel on July 21 of the same year, and foreign securities firm E naked short sold 5,520 shares of GenCuris over two days on June 19 and June 22. Another securities firm naked short sold 5,710 shares of Soulbrain on August 10, 2020. These three firms were each fined 54 million KRW.

According to the meeting minutes, the foreign securities firm that short sold GenCuris explained at the Securities and Futures Commission, "The date provided by the lender as the settlement date was the cash settlement date, and it was later confirmed that the date when the stock was relisted on KOSDAQ was after that," adding, "We deeply regret the occurrence of the short selling issue and have strengthened additional post-verification procedures to prevent similar short selling cases."

It was also revealed that a foreign pension fund engaged in naked short selling during the short selling ban period. The foreign pension fund sold 494 shares of Huons on March 20, 2020, without borrowing the stocks, and had previously naked short sold one share each of Medytox and Doosan on April 17 and October 23, 2019, respectively. The pension fund was fined 81 million KRW.

On the same day, the Securities and Futures Commission imposed a fine of 1 billion KRW on foreign securities firm A for naked short selling 410,618 shares of three stocks including Shinhan Financial Group from August 23, 2019, to March 13, 2020. The total amount of naked short selling reached 26.14 billion KRW.

Domestic securities firms were not caught naked short selling during the COVID-19 ban period. However, one domestic securities firm was fined 36 million KRW for naked short selling 528 shares of Celltrion worth 160 million KRW on January 9, 2018. Another domestic securities firm violated the uptick rule by short selling 75,576 shares (15.85 billion KRW) of five stocks including Samsung Electronics from January 26, 2017, to March 14, 2018.

The uptick rule was created to prevent price declines and increased volatility caused by short selling, allowing short selling quotes only at or above the last transaction price. This securities firm also violated the uptick rule by short selling 149 shares (5.05 million KRW) of Cheil Pharma Holdings during a similar period. Another securities firm violated the uptick rule by short selling Celltrion and Netmarble stocks on January 15, 2018, and July 12, 2019, respectively, and was fined 72 million KRW.

Korea Investment & Securities was fined 1 billion KRW for failing to mark short selling on 939 stocks including Samsung Electronics from February 2, 2017, to May 18, 2020. After this fact was reported on the 26th, domestic and foreign securities firms such as Hong Kong-based CLSA (60 million KRW), Meritz Securities (195 million KRW), Shinhan Financial Investment (72 million KRW), and KB Securities (12 million KRW) disclosed that they had been fined for violating short selling regulations.

After the short selling ban was imposed on March 16, 2020, individual investors suspected market makers of violating short selling regulations. Market makers are securities firms that lead price formation by quoting bid and ask prices and provide liquidity to the market. Due to this special status, they were allowed to short sell exceptionally during the ban period. When such suspicions arose, the Financial Services Commission instructed the Korea Exchange to conduct a special audit, and the Korea Exchange reportedly detected four securities firms including CLSA.