[The Editors' Verdict] Short Selling and Fairness

[Asia Economy Reporter Jeon Pil-su] A weekend golfer who averages 90 strokes and one who averages 100 strokes bet 1,000 won per stroke. In this case, the player who scores 90 gives 10,000 won in advance to the player who scores 100. On average, the player who wins by 10 strokes pays in advance for those 10 strokes. It seems like a very rational and fair game. However, there is a variable called ‘baepan’ in this game. If there is a baepan where the bet per stroke is 2,000 won on at least 4 to about 10 of the total 18 holes, would this game still be fair?

The short selling debate is heating up. After it was revealed that Korea Investment & Securities was fined 1 billion won for conducting short selling without indicating it (exclusive report on July 26), even the president raised his voice to strictly crack down on illegal short selling. With the president stepping in, the authorities responded swiftly. Kim Ju-hyun, Chairman of the Financial Services Commission; Lee Bok-hyun, Governor of the Financial Supervisory Service; Shin Bong-su, Head of the Anti-Corruption and Strong Crime Division at the Supreme Prosecutors’ Office; and Kim Geun-ik, Chairman of the Market Surveillance Committee at the Korea Exchange held a joint meeting of related agencies to discuss ‘strengthening detection and punishment of illegal short selling and improving short selling-related systems.’

After the meeting, the government announced plans to lower the collateral ratio for individual investors from the current 140% to 120%, and to activate securities lending transactions without repayment period restrictions for individual investors who meet the criteria for professional investors. Considering that the collateral ratios for domestic institutions and foreigners are around 105-120%, this adjustment aligns the standards.

Although it seems like a fairly fair improvement, individual investors surprisingly strongly opposed it. Jeong Ui-jeong, representative of the Korea Investors Union, which has over 50,000 members, questioned, “How much more will individuals, who lack capital and information, engage in short selling just because the collateral ratio is lowered, and what benefits will they gain?” This argument is understandable even from the standpoint of those who do not even know how to conduct short selling.

A few years ago, I had a conversation about short selling with an individual investor managing stocks worth hundreds of millions of won, and this investor believed that instead of restricting short selling, individuals should be given the same opportunities as foreigners or institutions. This is 100% in sync with the current government’s improvement plan. I even nodded back then (not a prime minister like Hwang Hee, though).

Currently, the proportion of short selling by individuals is just over 2%, with 98% by foreigners and institutions. Probably, individuals who engage in short selling are ‘super ants’ or very aggressive full-time investors. Among the nearly 9 million to almost 10 million individual investors, it is likely only about 1-2%. Until now, I have never met an investor who tried short selling except for full-time investors. Most individual investors tend to be intrigued when there is talk that short selling is a major cause of stock price declines, even if the evidence is weak. This is why the government’s improvement plan to provide fair opportunities to individual investors is unlikely to receive widespread support from the majority of individuals.

The capital market is inevitably a tilted playing field. This is because a person with 100 million won and a person with 1 million won play the game under the same ‘rules.’ What the government, which manages and supervises the game, should do is not to cheer for the person with 1 million won but to create rules applied by the same standards and ensure that everyone strictly follows those rules. After violations of short selling rules by domestic securities firms, illegal naked short selling violations by foreign securities firms were also revealed (exclusive report on August 2). It would be problematic if cheating runs rampant on an already tilted playing field.