S. Korea imposes 6-month ban on stock short-selling

South Korea’s financial authorities on Friday announced a six-month ban on short-selling in the local stock market, effective Monday, in an effort to reduce market volatility amid the spread of COVID-19.

The hurried action came as the country’s stock market nose-dived earlier the same day, triggering a temporary trading halt in both the main bourse Kospi and the secondary Kosdaq.

“Short-selling of all listed stocks on (the main bourse) Kospi and (secondary) Kosdaq and (tertiary) Konex will be banned from six months, from March 16 to Sept. 15,” the Financial Services Commission said in a release.

“In light of the serious circumstances, we decided to enact the ban for six months, after which we shall review the necessity of an extension.”

The latest trading ban was the third of its kind ever imposed by the Korean government. Similar bans took place in 2008 during the global financial crisis and in 2011 in the wake of the European financial crisis.

The regulator’s action followed on the heels of an emergency macroeconomy-finance policy meeting chaired by Deputy Prime Minister and Finance Minister Hong Nam-ki to review the financial market situation and to discuss policy actions to minimize the economic fallout from the pandemic.

FSC Chairman Eun Sung-soo attended the top-level meeting, along with Bank of Korea Gov. Lee Ju-yeol and Financial Supervisory Service Gov. Yoon Suk-heun.

A key item on the agenda was the possibility of imposing additional restrictions on the rampant practice of short-selling in the local stock market.

Earlier this week, the government introduced new regulations in a market-stabilizing effort, loosening the requirements for designating overheated short-selling stocks. Those new measures took effect immediately on Wednesday and were to last for three months.

But there were growing calls that short-selling needed to be banned altogether, at least temporarily, until the stock market could recover.

Short-selling is a strategy of borrowing, selling and repurchasing stocks to return them to the lender, betting that the price will drop. It can be used to raise liquidity and boost stock prices in a sluggish market but is also often blamed for increasing volatility. The more stock prices fall, the more profit the traders get.

Amid a plummeting market, the volume of stocks short-sold here has recently set records, kindling complaints among individual investors over what they consider an uneven playing field.

The daily short-selling volume came to a yearly high of 1.09 trillion won ($892.8 billion) as of Thursday’s closing, surpassing the previous record of 1.08 trillion won four days prior, according to bourse operator the Korea Exchange.

Foreign investors accounted for a large part of the latest short-selling spree. They traded 753.1 billion won, up 78.6 percent from the previous session’s closing. Institutional investors, in contrast, traded 323.7 billion won the same day, down 41.7 billion on-day.

By Bae Hyun-jung (tellme@heraldcorp.com)