Exchange: "Market maker short selling is inevitable... Blocking it would cause more harm"

The Korea Exchange (KRX) stated on the 9th, "The exceptional allowance of short selling for market makers and liquidity providers does not pose a risk to market stability and is ultimately a measure for the trading convenience of market participants." This explanation was provided in response to recent demands from individual investors, amid a complete ban on short selling, calling for a ban on short selling by market makers as well.

On the same day, KRX issued a press release titled "Explanation of Exceptional Transactions During the Short Selling Ban Period," stating, "If exceptional short selling by market makers and liquidity providers is prohibited, it becomes difficult for them to submit market-making and liquidity supply quotes, making smooth trading for investors in the relevant stocks challenging." It further emphasized, "For example, if the supply of buy quotes from ETF liquidity providers decreases, investors' selling opportunities are limited, and the price gap with the underlying assets widens, potentially causing investor losses."

Recently, financial authorities have imposed a complete ban on short selling for all stocks in the domestic market starting from the 6th. However, exceptions have been made to allow borrowed short selling for market makers composed of some domestic securities firms for market-making purposes, stock liquidity providers for liquidity supply purposes, derivative market makers for hedging purposes, and ETF liquidity providers for hedging purposes.

The exchange explained, "During the three previous short selling bans, borrowed short selling was allowed for hedging purposes, and major overseas countries such as the United States, the European Union (EU), and Australia also exceptionally permitted short selling by market makers when imposing short selling bans."

According to the exchange, from the 6th when short selling was completely banned until the day before, only 'hedging purpose' short selling by derivative market makers and ETF liquidity providers occurred in the domestic stock market. The scale was less than 1% of the trading volume of KOSPI and KOSDAQ stocks.

It added, "When buy quotes submitted during market making and liquidity supply are executed, resulting in holding a long position, risk hedging against price fluctuations is essential. To hedge risks, it is necessary to sell the underlying asset stocks, and if the underlying assets are not held, borrowed short selling becomes inevitable," reiterating the point.

However, naked short selling is strictly prohibited even for market makers and liquidity providers. A KRX official said, "We will thoroughly monitor whether liquidity providers and market makers comply with all regulations related to borrowed short selling," and added, "The Market Surveillance Committee will also focus on verifying borrowing contracts for liquidity providers' and market makers' accounts to closely inspect whether borrowing has occurred."

In this regard, Kim Ju-hyun, Chairman of the Financial Services Commission, said at the National Assembly's Finance and Economy Committee plenary session on the same morning, when asked about the possibility of additional short selling bans on market makers, "We will listen again to opinions on what significance it would have for investor protection and the development of our market."