Korea considers extending ban on short selling until June

South Korea’s top financial regulator is likely to extend the temporary ban on short selling by institutional and foreign investors until as late as June, as it plans to establish a system that would enable individual investors to short sell stocks around that time, market officials said Sunday.

At a Jan. 25 meeting, the Financial Services Commission reportedly encouraged working-level officials from stock brokerage firms to pick up the pace to set up the short selling system for retail traders by June. Short selling is a practice whereby investors borrow stocks only to immediately sell them, then repurchase the stocks to return them to the lender. Short sellers profit if they buy the stocks back for less than they received.

“While pledging to give full support, the FSC encouraged the stock brokers to pick up the speed to build the short selling system by May or June,” an official from one of the brokerage firms said.

With the FSC’s latest move, it is widely expected that the temporary ban on short selling, scheduled to be lifted March 15, can be extended to June. Amid the stock market crash in March last year, the Korean government placed a six-month ban on short selling to prevent sharp drops in stock prices, then it extended the ban for another six months.

Along the way, short selling has become a socially and even politically sensitive issue, as the practice mostly benefits institutional and foreign traders with deep pockets and a high tolerance for risk, who profit from downturns in stocks.

The amount of borrowed stocks held by retail traders that could be used for short selling stood at 23 billion won ($20.5 million) as of 2019, which amounted to three-thousandths of all borrowed stocks held by institutional and foreign investors.

Currently only six securities firms, including NH Investment & Securities, Kiwoom Securities and Daishin Securities, allow individual traders to carry out short selling, but the number will likely increase with the FSC system in place.

Mirae Asset Daewoo, Korea Investment & Securities, Samsung Securities and KB Securities, all of which participated in the Monday meeting, are among the stock brokers that may take part in the FSC’s plan.

Some market watchers also say the recent duel in the US between short selling hedge funds and retail investors surrounding stocks like GameStop and AMC may have made the domestic financial authority think twice about the March resumption of short selling.

By Kim Young-won (wone0102@heraldcorp.com)