[Column] Full Resumption of Short Selling Within the Year?..."What Really Matters"

Still Disadvantageous to Individuals Including Uncovered Short Selling
Focus on National Standards Before Global Standards

“Is this a hotspot for short selling?” This phrase, often seen on online stock forums, contains a sarcastic remark about our stock market. Although we have entered an era with 10 million individual investors, it remains a painful reality that our stock market is still a playground for foreigners and institutions.

In this context, controversy has reignited as Lee Bok-hyun, the Governor of the Financial Supervisory Service, hinted in an interview with a foreign media outlet at the full resumption of short selling within this year.

Short selling literally means borrowing stocks that you do not own and selling them. If the stock price falls afterward, you buy them back to repay and make a profit. Currently, short selling has been partially resumed. In March 2020, when the KOSPI index fell below 2000 due to the COVID-19 pandemic, short selling was banned. Then, in May 2021, short selling was resumed only for 350 large-cap stocks among the KOSPI 200 and KOSDAQ 150.

Governor Lee’s rationale for advocating the full resumption of short selling is as follows: for our stock market to be included in the Morgan Stanley Capital International (MSCI) Developed Markets Index, the short selling regulations, which are a condition set by MSCI, must be relaxed. Another reason is that inclusion in the MSCI Developed Markets Index would attract more foreign investors’ funds, leading to a clear positive effect on the stock market.

This logic seems reasonable for the advancement of our capital market. However, there are many tasks to be addressed before fully resuming short selling. The rules of fair play must first be established. Currently, short selling in our stock market is a system disadvantageous only to individual investors. Individual investors find it difficult to borrow stocks themselves and face discrimination in the repayment period. Foreigners and institutions have an unlimited short selling repayment period, whereas individuals are limited to 90 days.

Naked short selling is also problematic. Since 2008, naked short selling has been illegal in our stock market but has been effectively neglected. Because short selling must be repaid within two days after selling to avoid records, there is no way to verify whether the stocks were actually borrowed or created out of thin air. This issue has already been exposed several times through the phantom stock incidents involving securities firms, prompting the government to introduce a computerized system to record short selling transactions. However, since this system is optional rather than mandatory, it has been criticized as being “effectively neglected.”

Short selling is not a battle between foreigners and institutions versus individuals. Individual investors do not deny short selling itself. However, for the advancement of our stock market, it is necessary to properly establish a “national standard” before adopting the “global standard.”