[Exclusive] Securities Firms Earned 23.6 Billion Won from Short Selling Income Amid 'Sharp Market Decline'

First Half of This Year's Revenue Nears Last Year's
Short Selling Banned in March 2020
Partially Allowed Since May Last Year
Possible on KOSPI 200 and KOSDAQ 150
This Year's Revenue Expected to Surpass 2019
Top Brokerage Firms by Commission Income
Foreign Firms Like Morgan Stanley Dominate

On the 26th, when the won-dollar exchange rate surpassed 1,420 won for the first time in about 13 years and 6 months, dealers were working in the dealing room of KB Kookmin Bank in Yeouido, Seoul. On the same day, the KOSPI index opened at 2,260.80, down 29.20 points (1.28%) from the previous trading day, continuing its downward trend. Photo by Jinhyung Kang aymsdream@

[Asia Economy Reporters Ji Yeon-jin and Gu Chae-eun] This year, securities firms' revenue from short-selling fees is expected to recover to pre-COVID-19 levels. Currently, short-selling is only partially allowed for KOSPI 200 and KOSDAQ 150, which means that short-selling transactions are happening almost as much as before the pandemic when short-selling was fully permitted.

According to a comprehensive survey of short-selling revenue over three years from 60 domestic securities firms, submitted to Rep. Yoon Young-duk of the National Assembly's Political Affairs Committee by the Financial Supervisory Service, these firms earned 23.61 billion KRW in short-selling fees in the first half of this year. This amount is close to the 29.28 billion KRW earned throughout last year.

Short-selling is an investment technique where stocks are borrowed and sold when a price drop is expected, then repurchased at a lower price to return the stocks and realize a profit. Securities firms that facilitate short-selling transactions collect transaction fees.

According to the Financial Supervisory Service, securities firms' short-selling fees amounted to 44.6 billion KRW in 2019, just before the COVID-19 pandemic. If this trend continues, short-selling revenue for securities firms this year is expected to exceed that amount. The government had fully banned short-selling in March 2020 during the COVID-19 market crash but resumed it in May last year, allowing short-selling only for 350 large-cap stocks, including KOSPI 200 and KOSDAQ 150, due to opposition from individual investors.

As a result, securities firms' short-selling fee revenue last year was far below pre-pandemic levels. However, this year, with the market downturn continuing from early in the year amid concerns over tightening by the U.S. Federal Reserve, short-selling activity has intensified, leading to a recovery in fee revenue. The KOSPI, which surged to 3,300 points in May last year, fell below 3,000 points in January this year and recently dropped to around 2,200 points. The KOSDAQ, which had reached the 'Cheonsdak' level, is now threatened at the 700-point level.

It is also suggested that if short-selling had been fully allowed, the market might have fallen even further. Lee Kyung-soo, a researcher at Hana Financial Investment, cited examples of the KOSPI rebounding after short-selling bans during the European debt crisis in August 2011 and the COVID-19 crash in 2020, analyzing that the market hits a bottom and rebounds when short-selling is banned. He pointed out, "Since the temporary ban on short-selling was lifted in May last year, the KOSPI index has started to decline again." Earlier this year, the government considered fully allowing short-selling to be included in the Morgan Stanley Capital International (MSCI) index, but due to the sharp stock price decline and the change of administration, partial allowance of short-selling remains in place.

The securities firm with the highest short-selling fee revenue in the first half of this year was Morgan Stanley (6.44 billion KRW), followed by Credit Suisse (CS) Securities (3.15 billion KRW), JP Morgan Securities (2.99 billion KRW), and Merrill Lynch Securities (2.65 billion KRW), with foreign securities firms overwhelmingly leading in revenue. CS Securities had the highest short-selling fees until 2020 but lost the top spot to Morgan Stanley last year. Among domestic securities firms, Samsung Securities earned the most (1.39 billion KRW), followed by Shinhan Financial Investment (830 million KRW).

Professor Sung Tae-yoon of Yonsei University's Department of Economics said regarding the full resumption of short-selling, "Short-selling itself is a common system, but there are issues of regulatory asymmetry between institutional and individual investors, and the financial market can become more difficult, so the full resumption of short-selling should be carefully considered."

Rep. Yoon Young-duk pointed out that "there is a systemic issue where individual investors have more difficulty accessing short-selling compared to institutional investors," and emphasized, "We must prevent individual investors from suffering greater losses from stock price declines than institutional investors."