Open the way for short selling by retail investors, lawmaker says

South Korea’s stock market saw a combined 498 trillion won ($428 billion) worth of short selling transactions from 2015 to 2019, but a high bar exists for retail investors wishing to engage in the practice, a lawmaker said Monday.

Ruling Democratic Party Rep. Lee Jung-mun said retail investors need greater access to short selling, and called for the introduction of legislation before the temporary ban on the short selling of listed shares here expires in March 2021.

The annual volume of short selling has slowly increased each year, from 87 trillion won in 2015 to 103 trillion won 2019, according to the Korea Exchange data compiled by Lee.

During those five years, almost 7 out of 10 short selling transactions were carried out by foreign investors, while local institutional investors accounted for nearly 3 out of 10. Only 1.1 percent of the transactions were carried out by Korean retail investors.

When it comes to capital returns from short selling, foreign investors from 2017 to 2019 enjoyed yields of 31.5 percent from the 10 largest stocks they shorted on the main bourse, Kospi. Korean institutions gained 21.7 percent from taking short positions on the top 10 stocks over the cited three years. In contrast, retail investors took a 0.46 percent loss during the same period.

Lee said the estimate shows that Korean retail investors lack access to the stock investing technique, which involves betting on a price fall, although short selling was mainstream in the Korean stock market until the temporary ban was imposed in March 2020.

“Retail investors are lagging behind in terms of access to information and capability to muster enough capital to do short selling, compared with foreign investors and Korean institutional investors,” Lee said.

“The Financial Services Commission should come up with a legal ground so that individual investors will no longer be kept at bay, while the regulator should toughen rules to ban naked short selling before the short selling ban expires.”

Korea is anticipating a parliamentary audit in October. The KRX regulator, the Financial Services Commission, is scheduled to undergo auditing Oct. 23.

By Son Ji-hyoung (consnow@heraldcorp.com)