[The Editors' Verdict] Policy Requires Persuasion... Stubbornness Must Be Abandoned

The Increase in Net Foreign Purchases Does Not Justify the Short Selling Ban: A Misjudgment
Policy Should Move Forward Through Understanding and Conflict Resolution, Not Self-Congratulation

In October 2020, the Financial Services Commission conducted a voting event for the public on the 'Best Financial Policies of 2020.' Eight policies were nominated, including the ban on short selling. The financial authorities temporarily banned short selling in March 2020 to stabilize the market amid the spread of COVID-19. Opinions on this measure were divided, and controversy arose when the Financial Services Commission included it as a candidate for the best policy. Market participants frowned upon the financial authorities evaluating such a contentious issue as a best policy. Moreover, major advanced financial countries such as the United States, the United Kingdom, and Japan did not implement a short selling ban during COVID-19. Individual investors claim that short selling causes stock prices to fall, but there is no definitive theoretical evidence to prove this.

In fact, in October 2021, the international academic journal Financial Research Letters published a paper titled “The 2020 European Short Selling Bans and Their Effects on Market Quality,” which examined the cases of six European countries that banned short selling after the COVID-19 outbreak. The paper pointed out that “markets in countries with short selling bans had relatively lower liquidity and lower trading volumes. The regulators’ goals of preventing price declines and reducing volatility failed.”

The second open discussion session with individual investors was held on April 25 at the Korea Exchange Seoul Office Conference Hall. Participants, including Lee Bok-hyun, Governor of the Financial Supervisory Service (left), are listening to a presentation on measures to prevent short selling. Photo by Heo Young-han younghan@

Until then, the government’s short selling ban policy had a consistent rationale: to reduce volatility during crises. This was despite the consensus in domestic and international academia that short selling bans actually harm market efficiency. In Korean stock market history, short selling bans were implemented during the global financial crisis (October 1, 2008 ? May 31, 2009), the European debt crisis (August 10, 2011 ? November 9, 2011), and the COVID-19 crisis (March 16, 2020 ? May 2, 2021; after which the ban remained only for stocks outside the KOSPI 200 and KOSDAQ 150). Then, suddenly, a fourth ban was imposed last November. Although the stated reasons were to eradicate illegal short selling and improve the short selling system, criticism persisted that it was merely election populism aimed at winning votes from individual investors.

In this context, the short selling ban has once again been praised as a self-congratulatory policy. President Yoon Suk-yeol evaluated at a follow-up meeting on April 4 after a public discussion on livelihood issues that “seeing the recent increase in foreign investment in the stock market, the policy to abolish short selling was correct.” This is a misjudgment. The driving forces behind the increase in net foreign purchases are the AI rally centered on semiconductor stocks, expectations for U.S. interest rate cuts, and corporate value-up programs. This is not the reporter’s personal speculation but a common analysis among capital market experts.

Policies should not be driven by stubbornness. The damage from such policies ultimately falls on the public. Policies must proceed through understanding, conflict resolution, and persuasion. For the advancement of the capital market, it is hoped that there will be no more misjudgments or self-praise based on forced logic. The short selling ban, set to expire at the end of June, is likely to be extended. This is because the government estimates that completing the computerized system to prevent illegal short selling in advance will take at least one year. Therefore, rather than self-praising the short selling ban as correct due to increased net foreign purchases, it would be better to consistently persuade the public that once the computerized system to control illegal short selling is established, the market will return to the global standard (resumption of short selling). The reporter is just a “retail investor” and hopes that illegal short selling, which damages the market, will be eradicated, so this approach might be more useful for persuading the capital market.