Retail investors unnerved by plan to lift ban on short-selling

Concerns over the government‘s announcement that it would end a temporary ban on short-selling rose among retail investors Tuesday, as they claim that the reactivation of such trading practice could create market disruptions.

The Financial Services Commissions said it would end the prohibition on the trading strategy that makes a negative bets on stocks on March 15, as planned. The ban was imposed to prevent market volatility in the aftermath of COVID-19 pandemic in March last year for six months, and was extended for another six months.

A growing number of individual investors are calling on the government to keep the ban on short-selling in effect, saying the move was favorable to large and institutional investors.

A petition calling for a permanent termination of short-selling garnered more than 80,000 signatures as of Tuesday since it has been filed on the website of the presidential office Cheong Wa Dae on Dec. 31.

“The government’s job is to improve the investment environment to enable market participants to invest more freely and efficiently, not to dedicate money from citizens to institutions and foreign investors,” the petition reads.

Rep. Park Yong-jin of the Democratic Party of Korea, who has been a vocal critic of illegal short-selling practices and unfair rules, asked the FSC to make a “prudent decision” Tuesday.

He asserted that the financial authority has bolstered penalties for wrongdoings but hasn’t found ways to block them.

“Resuming short selling without correcting unfairness and institutional insolvency is a responsibility of financial authorities,” Park said.

Short sellers, mainly institutional and foreign investors, sell stocks they have borrowed, hoping to profit by buying them back at a lower price before they have to return them. Retail investors are allowed to short stocks here but securities firms seldom lend stocks to them due to their lack of credibility. The high risk that short-selling carries is another factor preventing private investors from using the strategy.

In response to retail investors’ concerns, the FSC, for its part, has come up with a set of measures.

“With a goal to allow the resumption of short-selling activities in March, we plan to wrap up system improvements including strengthening punishments against illegal short-selling, improving the market maker system and enhancing the accessibility of individuals to short selling,” the regulator told reporters in a text message.

In December, the FSC prohibited 22 security firms from conducting short-selling on the Mini-Kospi 200 Futures and Options, which the regulator expected would reduce the volume of short sales by market makers by 42 percent.

It also shortened the interval of inspection for illegal short-selling to one month from six months. The last measure designed to improve access for retail investors to short sales is expected to be announced in March.

By Park Han-na (hnpark@heraldcorp.com)